Date: 15 July 2014
Category: J Curve Management
Tags: J Curve Management
In our previous blog J Curve Management, we discussed how important it is to your business to manage J curves well. On your journey through time you look out over the horizon and you come up with an idea that you know is going to make your business stronger in the future. But you also understand that to implement and get value out of that idea, you need to take a step back before you can take any steps forwards.
This diagram shows why it’s called a J curve. The black curve represents the investment; it sucks the cash out of your business for an amount of time we call the risk zone, before coming back up to its starting point and eventually surpassing it. The diagram also shows you the three phases in the life of a J curve:
This phase starts at the beginning of the project and ends at the bottom of the valley. This phase has two main characteristics. Most investors understand the first one because it’s the most painful. This is where you write out the significant cheque to make the investment. The second characteristic is sometimes hidden and often ignored. But ignoring this issue can be dangerous. We call it cash flow bleeding when, even after you’ve paid the initial investment amount, the project is losing more money than it is making. This causes a drain on your cash flow. At some point the money coming in will equal the money going out. This point starts at the bottom of the valley and marks the transition to Phase 2.
In phase 2, the project is still cash flow negative over the life of the project but it’s beginning to catch up. It’s now bringing in more money than it’s paying out. Our ultimate objective is for the project to reach a point where you’ve made more money over the life of the investment than you have paid out. This point brings us to Phase 3.
When your project has delivered more to your business than it has cost, you have achieved the future benefit you originally invested for. You have become stronger today than you were yesterday as a result of that j curve investment.
The yellow arrow represents a calculation done by many businesses, which is to assess the length of time it will take before you are paid back for the amount invested. But there is much more to the investment than a single payback timeframe. It’s more important to understand how much cash is going to be sucked out of your business by this investment. This is why we refer to it as the risk zone. There are lots of things that can happen in your business while your J curve is in the risk zone. Any number of these can cause the project to stall, leaving you with nothing but wasted time and money.
Don’t let your J curves stall. Contact us to find out how we can help you manage your J curves to create the most value for your business.
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