Posted on March 21, 2017 @ 12:41:00 PM by Paul Meagher
I recently came into contact with the phrase Profit Resilience from reading Zach Loeks new book The Permaculture Market Garden: A VISUAL Guide to a Profitable Whole-systems FARM BUSINESS (2017). In the farming industry there is the problem that profits often don't come in steadily throughout the year and this can obviously be challenging for the farm business. To maintain income the farmer may have to take out loans to cover costs until the next production and sales period happens. Or, the farmer might create another line-of-business designed to generate income during these slow seasons so that a constant level of profits is achieved throughout the year. The latter option gets you closer to profit resilience.
Farmers can achieve more profit resilience if they don't rely upon one line-of-business to sustain them all through the year. Profit resilience is
achieved by introducing specific amounts and specific types of diversity into their income stream. I say specific because too much or too little
diversity can be detrimental. If we try to manage too many diverse types of business, then the complexity of managing it all can outweight
the marginal benefit of adding a new line-of-business. One solution might be to make the businesses less diverse so that similar skills can be used to manage each line-of-business (e.g., CSA, specialty crop, Garlic seeds). Unfortunately, the lack of industry diversity means that income may all track the same seasonal pattern we are trying to avoid. To achieve greater profit resilience the diversity of the lines-of-business have to be greater (similar to portfolio investing).
Profit resilience depends upon having the proper amount and types of businesses in your enterprise portfolio. The proper amount is 3 lines-of-business and the proper types are lines-of business whose profits are not correlated in time. Why 3 lines-of-business? This is just to give you a feasible number of businesses to consider in your planning. Ultimately, the number should be chosen based upon looking at all the small enterprises out there that are demonstrating profit resilience and tallying the number of lines-of-business they are engaged in. Ideally we would also examine small enterprises that failed and examine the number of lines of business they were engaged in. If 3 lines-of-business was identified as ideal then this could be a normative suggestion. Why do the lines-of-business we select have to be uncorrelated? This is ultimately an empirical question but, in the case of farming, it is clear that there can be problems with seasonality of income and if you select all your lines-of-business without ensuring the profits from them are uncorrelated or anti-correlated then you may not achieve profit resilience. The Portfolio Theory of investing might also be used to justify the need for a higher level of diversity among the businesses you invest in. The portfolio theory is arguably about achieving profit resilience, and not just profits.
Is the goal of your business to be profitable or to have profit resilience? You can be profitable without having profit resilience. It happens in lots
of businesses. The automotive shop I frequented went under in early February because they hit a low revenue part of their season and were carrying too many overhead expenses (they moved to a nicer shop with higher rents and more staff). Perhaps having more than 1 line-of-business would have helped but maintaining profit levels is made more difficult when you have higher expenses and encounter rough patches.
Everyone has to be concerned about profit resilience even if you are a senior on a fixed income. When you move from the daily grind into retirement it would be nice if you could achieve some profit resilience in the transition. Your income may be lower but if you also lower your expenses significantly you might be able to achieve some profit resilience during this transition. Likewise, if a business is going through a patch of low sales, then cutting out some expenses might help to achieve some profit resilience (difference between revenues and expenses remains relatively constant). You may also voluntarily decide to restructure your business to have lower income but also lower costs. If profit resilience is your goal rather than simply increasing gross revenue then this makes sense to do.
Profit resilience is a temporal concept in the sense that our time to rebound back to a previous level of profitability is measured by some time interval. If your income nosedives and you rebound back to your previous profit level a year later, is that still an example of profit resilience? Probably not. In the business world we tend to measure things in business quarters and that is probably as good an interval as any to use for measuring profit resilience, although monthly accounting is also a very popular accounting time frame.
Profit resilience can be achieved if we plant things today (e.g., apple trees) that might bear fruit in the future. We can't invest too heavily in
the future, however, if we want to retain profit resilience because the future is not generating revenue today. When selecting another line-of-business to add to the enterprises we should have a significant bias towards adding lines-of-business that will generate profits in the near term. One useful example comes from Mark Shepard who purchased more nut tree seedlings that he needed and used the proceeds from selling the extra seedlings to cover his purchase cost and then some. Even though something is being done for the long term it is nice when you can obtain a yield from it in the short term as well.
The term Resilience is popular these days so when I heard the phrase Profit Resilience I thought it was worth spending some time reflecting on various aspects of that phrase might mean. The last observation that I want make about the term Resilience is that it has been contrasted with two other terms - Fragile and Antifragile - by Nicholas Taleb in his important book Antifragile: Things That Gain from Disorder (2012). Profit resilience might be contrasted with profit fragility and profit antifragility, the latter being another concept worth exploring in a future blog.