3 And he spake this parable unto them, saying, 4 What man of you, having an hundred sheep, if he lose one of them, doth not leave the ninety and nine in the wilderness, and go after that which is lost, until he find it? 5 And when he hath found it, he layeth it on his shoulders, rejoicing. 6 And when he cometh home, he calleth together his friends and neighbours, saying unto them, Rejoice with me; for I have found my sheep which was lost. 7 I say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance.
Let’s begin with a few definitions that will begin to establish the truth of my title.
The Cost of Doing Business refers to all the expenses incurred by a firm or a sole proprietor in producing and selling goods or services.
Return on investment—sometimes called the rate of return (ROR)—is the percentage increase or decrease in an investment over a set period. It is calculated by taking the difference between current, or expected, value and original value divided by the original value and multiplied by 100.
Asset: anything that has value—whether tangible or intangible—and is owned by the business. Typical items listed as business assets are cash on hand, accounts receivable, buildings, equipment, inventory, (sheep…dm) and anything else that can be turned into cash.
In the above parable we have a scenario where an investor, in this case a shepherd, has observed a loss of one of his assets. It is important to understand when doing business in any shape or form that there are expenses incurred, these are the costs of doing business. In the case of the shepherd one of these would be the initial startup investment of the herd of 100 sheep. Not a small amount of capital and equity would have been required to procure said sheep, indeed it would take a large investment. An investment this large would warrant some form of strategy and analysis for sure. A good business plan would include some type of expected ROI which would outweigh the risks involved in said venture. Let’s look at a few more definitions.
Risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions.
Risk analysis is the study of the underlying uncertainty of a given course of action and refers to the probability of a project’s success or failure.
Economic cost looks at the gains and losses of one course of action versus another. It does this in terms of time, money, as well as resources. The term also includes determining the gains and losses that might have occurred by taking another course of action. Economic cost includes opportunity cost, unlike accounting cost, which only takes into account the amount of money spent. Economic cost is the accounting cost (explicit cost) plus the opportunity cost (implicit cost). Implicit cost refers to the monetary value of what a company foregoes because of a choice it made.
A loss-limit system limits losses to a fixed percentage of assets, or a fixed percentage loss from capital employed. Think of such a system as a circuit breaker. After a certain percentage has been lost the investor may very well stop investing entirely or may immediately exit the losing position. With this system, exiting a losing position is an unemotional decision that is not affected by any hopes that “it is sure to turn around any minute now.” A common level of acceptable loss for one’s investment is 2% of equity.
In today’s fast paced world of Wall Street and Stock Portfolios 2% of equity is a common level of expected loss for one’s investment. Losing one sheep falls under this threshold and leaves the shepherd’s investment in an acceptable loss status. There is no doubt that the ROI is still in good shape and there is no need to panic. The ninety and nine are still the priority. One lost sheep does not warrant taking a potentially catastrophic financial risk in leaving the entire herd unprotected, unwatched, and uncared for. A quantitative risk analysis would clearly come to this conclusion. What’s a quantitative risk analysis you say? Let’s look at a few more definitions.
Risk analysis can be further explained by dividing it into two categories, quantitative or qualitative. Under quantitative risk analysis, a risk model is built using simulation or deterministic statistics to assign numerical values to risk. Inputs which are mostly assumptions and random variables are fed into a risk model. For any given range of input, the model generates a range of output or outcome. The model is analyzed using graphs, scenario analysis, and/or sensitivity analysis by risk managers to make decisions to mitigate and deal with the risks.
Allow me to interject: To this point we have been looking at the numbers; the math of it all. It seems so clear doesn’t it? It doesn’t make sense to go after one lost sheep and risk the herd. It is financially irresponsible. If I were the shepherd, I would look for the lost sheep. Let me amend that statement, I would make an effort. Wait a sec, I… I would make a reasonable effort… to reclaim the lost asset. A reasonable effort is expected, so long as I could still see the herd. I couldn’t accept the risk of losing the herd. The benefits just don’t outweigh the risk. The Pro’s and Con’s don’t add up to the eventual outcome of the parable. Perhaps that is why there is such a celebration when the shepherd returns with the lost sheep, because it was a gamble. It was risky and it paid off. But there is another rationale to consider. This is where it gets interesting…
Qualitative risk analysis is an analytical method that does not identify and evaluate risks with numerical and quantitative ratings. Qualitative analysis involves a written definition of the uncertainties, an evaluation of the extent of impact if the risk ensues, and countermeasure plans in the case of a negative event occurring.
To understand this concept more clearly, think cyber security: where the overall cost of a data breach could be catastrophic. You couldn’t put a number on it. We can read about the shepherd’s qualitative analysis in Ezekiel 34:11-16
11 For thus saith the Lord God; Behold, I, even I, will both search my sheep, and seek them out. 12 As a shepherd seeketh out his flock in the day that he is among his sheep that are scattered; so will I seek out my sheep, and will deliver them out of all places where they have been scattered in the cloudy and dark day. 13 And I will bring them out from the people, and gather them from the countries, and will bring them to their own land, and feed them upon the mountains of Israel by the rivers, and in all the inhabited places of the country. 14 I will feed them in a good pasture, and upon the high mountains of Israel shall their fold be: there shall they lie in a good fold, and in a fat pasture shall they feed upon the mountains of Israel. 15 I will feed my flock, and I will cause them to lie down, saith the Lord God. 16 I will seek that which was lost, and bring again that which was driven away, and will bind up that which was broken, and will strengthen that which was sick:
To continue our analysis we need a few more definitions:
Market value is based on supply and demand. It is used to refer to a company’s market capitalization value. It is calculated by multiplying the number of shares issued by the price of the company’s share. A company’s share price is determined by daily trading between buyers and sellers on the relevant stock exchange. Market prices are easy to determine for assets as the constituent values, such as stock and futures prices, are readily available.
The market value valuation of the assets is a straight forward accounting of what the sheep are worth. It is what we can sell them for on the open market to achieve a profitable ROI. This valuation of assets is the determining factor of financial irresponsibility in leaving the herd to find one lost sheep. But what is the economic valuation of the sheep? What is economic value? I’m glad you asked.
The economic value of an asset is based on individual preferences. The same asset may have significantly different economic values for two different companies or individuals. For businesses, economic value represents the value that the company derives from using the asset. It is the same as the value in use. This may be higher or lower than the market value for a similar asset. However, economic value typically exceeds market value. The primary difference between market value and economic value is that market value is determined by the supply and demand of the asset in the marketplace, while the economic value represents the maximum amount the customer is willing to pay.
What is the economic valuation of one lost sheep? To understand the question we must ask, what is “the maximum amount the shepherd is willing to pay”?
When Jesus therefore had received the vinegar, he said, It is finished: and he bowed his head, and gave up the ghost. John 19:30
Did you know that one of the other meanings of the Greek word that was translated as “it is finished” means to pay? Strongs g5055 “discharge a debt”
Now we begin to see.
If the herd is ever given a quantitative valuation and one lost sheep is deemed, “expendable” or “an acceptable loss” or “a cost of doing business”, it can be said that the entire herd of sheep are regarded accordingly and they are only worth fair market value to the shepherd. The ROI is highest if they never stray.
If the shepherd is “willing to pay the maximum amount” for one lost sheep, the valuation of the herd goes up by the same amount. Each sheep then retains this valuation if the Shepherd will leave the ninety and nine and find His lost sheep.
The fiscal irresponsibility alluded to in the title of this article is based on a Quantitative Valuation of a herd of sheep and the Market Value of one lost sheep. If the shepherd does not go after the one lost sheep, it proves the Quantitative Valuation based on Market Value to be true. Thus, it becomes fiscally irresponsible.
However, by leaving the ninety and nine the shepherd has placed a Qualitative Value (unable to quantify with numbers) on EACH ONE of his sheep.
In verses six and seven the parable shows us that the shepherd’s valuation of his sheep is based on an Economic Value i.e. the “maximum amount that He is willing to pay”.
Rejoice with me; for I have found my sheep which was lost. 7 I say unto you, that likewise joy shall be in heaven over one sinner that repenteth, more than over ninety and nine just persons, which need no repentance.
When applying these economic principles to the parable we can illustrate not only the value of one sheep but the value that is attributed then to the whole. The parable never mentions which sheep was lost, just that a sheep was lost. All of the sheep are either equally expendable or equally invaluable based on the shepherd’s valuation of the one lost sheep.
So, if you are feeling neglected and forgotten and all the work you do for the church is unappreciated, and your self-worth is depreciating, remember the ninety and nine and the definition of Economic Value. If you are ever sitting in church and you notice that all of your ministry are off to find the lost sheep, remember this lesson. When you wonder why we spend so many resources to send ministry all over the world…smile and remember…
… just how valuable you are.