That is to say the profit the business can generate and the requirement of the farming family for cash both have a strong and opposite effect on sustainable business growth. The operating profit, both in its fairly basic commonlyused form and once it has been adjusted for physical resource depletion or development, is a very important determinant of business health. The extracted cost of equity is a reflection of both lifecycle and lifestyle expectations of the family and, in our research so far, plays a more important role in sustainable business growth than the cost of debt. I am often asked what the target should be for sustainable business growth. Unlike operating profit there is not an amount per hectare that springs to mind.
Waters are well muddied by the time financier and family expectations come into the equation.
Instead I usually say it should at least be above zero for those with a relatively short time frame left in the business but should be a greater amount if the family has a requirement for business growth to finance succession and retirement plans or reckons to be in business for some time yet. A useful approach is to set the sustainable business growth target as a percentage of Gross Farm Income each year. An important requirement of this measure is that it should always be calculated over a number of years. It is the trends in both operating profit and extracted cost of capital that need to be analysed to determine how well the business is managing sustainable business growth. The Sustainable Business Growth approach is now being tested in a number of countries overseas.