We are in the final days of our 2021 winter Executive Link meetings where Ranching for Profit alumni form peer advisory boards and look into each other’s businesses for strategic level advice. One issue that frequently comes up is the evaluation of adding a new enterprise to the operation. The operator is often excited about the new enterprise and what it could add to the business. They often present it to the board almost as a sales pitch. Like this new enterprise will be using products from one enterprise to feed the other, it will provide cash flow in a typical hole in the business and it will balance out risk through diversification.
When the board starts questioning the operator, they often discover added overheads (tools, machines, infrastructure etc.), often an additional herd that will make the grazing program less effective and an additional set of new chores of checking, moving and so on. Furthermore, when diving into the economics, it isn’t unusual to find that the gross margin of the new enterprise could simply be covered by just scaling the current most profitable enterprise. For example, I might want to add a sheep herd and I’ll show you my due diligence that my new sheep herd will add $20,000 of gross margin to my business. However, when you look at my heifer enterprise where I currently run 300 heifers with a gross margin of $350/heifer, it is apparent that I can produce the additional $20,000 of gross margin by simply adding 57 heifers to that enterprise. I won’t need another herd, I won’t need infrastructure to run sheep, and running the extra heifers will require no additional labor from what I’m currently doing.
Diversification is not a profit maximizing strategy…it is a risk management strategy. I’m not suggesting having no diversity in the business, but being busy taking care of a bunch of little enterprises is not the path to a healthy work/life balance. Most successful businesses I see have one, two, or three things they do well and at scale. If you are considering adding an additional enterprise here are some questions to consider:
What gross margin will this contribute right now and later when fully scaled?
What additional overheads are needed to make this work well? What will be the annualized cost of those additional overheads?
What is the minimum profit this enterprise must add to the business or it is just a distraction?
How much labor and management time will this enterprise add to existing personnel?
I’m all for looking for ways to keep your business fresh. It is true that sometimes by adding a new enterprise that initially is not profitable you can eventually scale this enterprise in the future to be a profit leader in a business. However, some careful analysis on the front end can lead to avoiding chasing expensive squirrels that just create more busy work. I recommend that you take the time to look at scaling up your current most profitable enterprise first.