Silver spoons or balls of steel

I’m sure you will be familiar with the traditional learning curve. You know the one where it goes up quite rapidly at the start and then slowly starts to plateau out. In theory everybody continually improves but after a while the rate of improvement is so marginal that it’s barely noticeable.

But in practice it doesn’t actually work like that.

One of my closest friends has a senior position with one of the major banks and they assessed the performance of all their financial advisers. What they found was that after two years the performance of those financial advisers peaked. And then it dropped for a while and then having dropped a bit it then bottomed out. And it remained at a flat level pretty much for the rest of the careers of those financial advisers.

Why did it go like that?

What happened was that when you are going up the learning curve at the start it’s exciting. Everything is interesting, and you’re engaged with what you do. But when the work starts to repeat itself, you can get a little bit bored, and your performance will drop.

But of course, by then you know what you are doing and are actually quite good at whatever you do so your performance only drops so far, before it plateaus out.

Welcome to the rut! 

All businesses (and business owners) will find themselves in that sort of rut every now and again. The first one is often about 5 or 10 years in. This is when your management style is evolving, and you are building your skills. Eventually you get to that point where without some big changes, you are always going to be where you currently are.

And what then?

Well, you can keep tweaking and fine-tuning and take on some Elton-like characteristics. Maybe you can find yourself a side hustle that is more of an investment than a business (usually with property of some kind). Be careful though, sometimes side hustles can take up so much of your time and energy that they affect the main part of the business.

Or you can take a chance and make a change.

This is where you need to be brave. Because it might not work out. You might find yourself licking your wounds two years down the line having put a huge amount of time and / or money into whatever it is that you tried to do.

Of course, this is what being an entrepreneur is all about. Taking a risk.

The first question you need to consider is how much of a risk are you prepared to take?

Are you prepared to risk everything you have for the chance of building a multi-million pound firm?

There are usually two types of people who will do that:

• Those with very rich parents who will bail them out if disaster falls
• Those with balls of steel.

If you don’t fit either of those categories, then you have a balancing act to do. Because there are only factors that you are chasing at this stage:

• Profit
• Growth

Of course, the two have an implicit relationship. Manage your growth in the right way and it will convert into good profits. Re-invest those profits into marketing, technology, training and all those other things that drive growth and further growth will come.

There are two key metrics here:

• Percentage rate of growth
• Net profit as a percentage of turnover

There is a trade-off between these two metrics which is based on your attitude to risk. This is shown on the three graphs below:

Someone with a high attitude to risk and a high desire to grow would have a graph that looks something like this:

As you can see, someone with that mindset would be prepared to prepared to suffer losses in order to achieve high levels of growth. This is of course the path that many dot com businesses of the early part of this century followed. Amazon for example had 8 years of losses before achieving a profit.

Many of those businesses never made it to profit of course and no longer exist.

For smaller owner-managed businesses, the risk is not that they never make it into profit but that they can’t finance their growth. Or even if they can. the management team can’t handle all the issues they have to handle and mistakes start to happen.

On the other hand, someone with a low attitude to risk and a higher desire for profit than growth would have a graph that looks something like this:

One of my clients once called me on a Monday to tell me about an article he had read in a Sunday newspaper business section that said that no good business should be functioning without an overdraft. He asked me what he was doing wrong. He was very profitable.

The answer was that he was “under-trading”. In  business terms, he should have been maximising the potential of his business by borrowing and expanding.

But he didn’t want to do that. He was happy. He had more than enough money to keep him happy. Good for him.

For most of us there is a more gentle trade-off between growth and profit and our graph would look something like this:

The line on your graph will be different to mine and to everyone else’s. You just have to decide where it is. Everyone’s definition of success is different. If you weren’t born with a silver spoon in your mouth, you don’t necessarily need balls of steel but they might need to be made of aluminium at least.