Effective Business Planning with a J Curve
Successful small business owners keep their eyes on the future, rather than focusing primarily on day-to-day operations. But planning for that future is an art in itself and, in my experience, best approached with a set of realistic expectations.
Not long ago, I came upon an insightful article that suggested incorporating the economic concept of J Curves in effective business planning. For those unfamiliar with the concept, a J Curve is defined as “a theory that the internal rate of return of a fund will be low in its early stages … but then as the firm becomes more profitable, the internal rate of return will increase—if graphed over time, the shape looks like a J.”
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According to financial advisor Nick Setchell, “J Curve investments are strategic decisions to spend money today to receive a benefit tomorrow.” In his article, Setchell notes that every business has J Curves for numerous critically important elements, including:
• Addition of a new product line
• Hiring new staff
• Purchasing new or upgraded equipment
• Opening a new location
• Investment in R&D
• Acquiring a competitor
As part of the planning process, a business leader should keep several J Curve-related principles in mind:
Focus on the big picture. The CEO isn’t in place to put out operational fires on a daily basis. His or her primary responsibility is remaining focused on the long-range, strategic growth. This involves monitoring and managing those J Curves with the greatest potential impact on a company’s future growth.
Remain objective about new ideas and new hires. Savvy business leaders rightly place great value on coming up with fresh, innovative ideas. Within the context of the J Curve, however, excitement about a new initiative must be tempered with an objective assessment of its relative costs and risks.
The same holds true for key hires. How many times have you been “wowed” by a new high-level executive, only to discover that he or she isn’t generating actual value for your company? Such an individual can suck precious resources from your business, taking on the form of a “ski slope” type of J Curve.
In many situations, too much time is wasted focusing on money that’s already spent. Evaluating the relative worth of “sunken costs” is irrelevant. What’s genuinely important is determining what happens going forward. Ask yourself: Will future expenses produce the results you’re looking for?
Reign in the number of J Curves in progress. It’s easy for a business to find itself swamped with co-existing J Curves. Too many big initiatives happening at once drain precious resources and end up with little to show for the effort. Again, the CEO is the person responsible for determining (a) if the investment demonstrates actual strategic benefits for the company and (b) if now is really the right time to take on a particular J Curve initiative.
A word of caution: Business planning is critically important, but remember that initiatives often take more time and cost more money than expected. Are you prepared for this? Do you have additional resources to commit to a project? The plans we design are linear in nature, but events unfolding in the real world rarely assume a linear form.
Brad Mishlove is the Founder and CEO of Catapult Groups, an Executive Coaching and CEO Peer Advisory Firm headquartered in Las Vegas, Nevada. Mr. Mishlove also serves as executive coach, mentor, and senior advisor to Chief Executives, Business Owners, and entrepreneurs. Clients typically hire Mishlove to bring strategy, systems, and accountability to growing enterprises. Contact Catapult Groups today to schedule a 30- minute CEO strategy session.