How you get where you want to go
I didn’t coin the term TRAP ZONE but have talked about plateaus of profitability and the cash crunch valleys that come between them. I prefer the concept of plateaus rather than peaks, because plateaus are flatter. If you’ve hit a level of profitability, why wouldn’t you want to stay there for a while before deciding if you should invest for the next growth spurt?
My advice is always to A) know your numbers well enough to expect this volatility and B) try to predict the size and shape of the next valley so you know whether to scale back and stay on the plateau or you have the resources to push all the way through the valley to the next profitable space.
I want to return the shoutout to Guesswork Investing for sharing their personal journey through the failures and successes of searching, finding, and growing an SMB. I’ve been reading their stuff since they started posting and now they’ll be sharing even more personal details of their quest to climb out of the latest valley by hiring an ops manager. Highly recommended.
Guesswork’s revenue numbers of plateaus (at $2M and $5M) with a valley in between seem directionally accurate to me HOWEVER this varies a lot by industry and location so you really need to know your own numbers in detail.
Unit Economics
One thing I don’t see mentioned very often about growth is that if you understand the contribution dollars of a typical transaction, you can think of additional overhead costs not just in dollar terms but in terms of the number of additional transactions you’ll need to cover those expenses.
Since Guesswork needs to hire an Operations Manager, they could figure out how many more transactions the company needs to sell and service in order to cover that ops manager’s salary. Then estimate how long that will take. That will yield a reasonable guess of the investment cost for that hire. But that will only get them out of the valley. The next step is to estimate how much growth (and profit) that investment can generate before they max out the capacity at the next plateau.
Obviously you need to do these calculations in dollars. But if you also have some idea of the number of transactions required to produce those extra dollars, it gives you better insight into how to prepare for the process. That insight is provided by understanding your unit economics.
Go Forward or Back?
One thing to consider. If you get stuck in a cash crunch valley, it’s likely your company is the wrong size for the environment. Perhaps you didn’t push fast enough to exit the valley, or perhaps the environment changed. But I want to propose the idea that sometimes it’s fine to scale back to profitability rather than push ahead. A lot depends on what you want from your company and how you want to spend your time. But that’s a conversation for another day.
If you found this useful, here’s where you can find more like this.
My book Output Thinking where I talk about how thinking in outputs makes you a better manager.
1-1 Coaching – I only work with a few clients at a time but anyone can sign up for a free session. A coach can help you develop and apply your abilities as a manager and/or a leader.
I tweet a lot @BetterCEO