moneyFYI
Financial Freedom Is Merely Organized Common Sense
Evergreen Decisions
We should know to quit doing things that don’t work. Making them work is often not possible and a waste of resources. The other side is evergreen decisions. Decisions that work now and will work into the future.
In the early 90s I helped a friend negotiate the purchase of a film and video library. He and his partners were busily acquiring such collections with a view to having things available when their anticipated “On demand satellite TV” option came to pass. They were fairly ecumenical on what they would buy. Their idea was if we buy it right and only sell usage once in awhile, it will work. The idea was to get media that was inexpensive, interesting, useful and enduring.
Movies are expensive to put into that format, but documentaries, short TV pieces and such were not. They even wanted to buy the CBC evening news library back to the beginning. Their vision was that someday a high school student would be doing an essay on the 1970 FLQ crisis and what better resource than the CBC news in that period. Call up the satellite, find what you want, provide a credit card, and we send it to your then-unavailable set-top box.
The business model was based on the idea that each incremental sale had a near zero variable cost.
So it is with other decisions.
Decisions that require ongoing maintenance are more of a problem than ones that are once done, done forever.
In the beginning all decisions need maintenance but ideally you can see a way to cut that down. In a business, the decision frequently comes up around automation. If an expensive robot can replace three minimum wage jobs where there is high turnover and other employee problems, why would I not do it? Operational leverage is a decision basis for replacing hard to manage variable costs with capital investments and fixed costs.
Not all such decisions work out because they make the business more vulnerable in downturns. You cannot lay off the lease payment on a robot. A deeper understanding of the business can help solve the cost, volume, profit problems that arise. Like a portfolio, diversity can make the problem easier to solve.
Evergreen decisions tend to be operationally leveraged.
A similar idea includes things like books, movies, music recordings, computer chips, and software. Almost the entire cost is up front. The first processor chip costs $5,000,000,000 the second about $2.00. Movies cost $50 million. Your ticket is $10.00. These sorts of structures can become evergreen or they can die and fall to the forest floor. The good news is you know fairly quickly. Fail fast is a useful strategy. To nurse failing decisions is weak.
When you create a decision structure, consider which form you have. Prefer investments with high returns after cost recovery, a long shelf life and few maintenance issues.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 866-285-7772
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