The valley of death
You've been through the profit dip before and will again, here's how to survive it
A powerful, yet simple exercise to test your resolve to grow your business is the ‘game of noughts’. The rules are simple – just add a nought to your turnover, profit and headcount. So, if you currently have a turnover of £5m with £500,000 of profit and 50 people, imagine your business with £50m turnover, £5m profit and 500 people, and ask how it might be different. More importantly, how are you going to get there?
What would you have to keep and what would you need to lose to achieve those extra noughts? What’s holding you back from getting there as fast as you’d like? Will the extra noughts give you and your business what you want, or will the demands and sacrifices be too great for you?
Into the valley
As we grow our business it seems almost inevitable that we have to pass through several ‘valley of death’ experiences, usually at start-up, then again in the growth stages.
As a skilled micro business owner, you could perhaps make, say, £100,000 a year. But as soon as you start employing people, your profit tends to decline (with rising overheads, and the time taken for systems and staff to become fully productive).
It isn’t until much further down the line that you get back up to decent profitability (perhaps making £100,000 profit on turnover of £1m). The number of employees you have at this stage varies depending on your industry, but is typically between five and 10.
The same thing happens when you add one or even two noughts. At some point your profitability will tend to fall away as you become less efficient, or have to start making bigger investments to gain the economies of scale you seek.
Sharing the pain
Knowing that the ‘valley of death’ is not unique to your own business is little comfort. What’s more, you don’t know whether it’s a small dip, or huge valley – or worse still perhaps it’s a cul-de-sac you’ll never get out of (see Seth Godin’s book, The Dip).
It’s at this point that you question if the goal is even worth the hassle. Are you willing to pay the price to break through to the next level?
These are the critical points where most growing businesses fail. My advice is when you hit the valley of death, you should run as fast as you can. Sprint to get to the other side and to the next layer of sustainable profitability. But beware, the light at the end of the tunnel may just be an express train heading your way.
I’ll leave the last word to Woody Allen’s character in his film Love and Death…
“I shall walk through the valley of the shadow of death. In fact, now that I think of it, I shall run through the valley of the shadow of death, ‘cos you get out of the valley quicker that way.”
Robert Craven is an entrepreneur, businessman and author who has run Mastermind Groups and action-centred learning with Warwick Business School, Business Growth Programme and London’s Accelerated Growth Programme among others. His latest book, Grow Your Service Firm, is available now . He is managing director of The Directors’ Centre.