An Introduction to the U-Curve
Remember when you first started your creative agency, and you got your first client? Best feeling in the world. It was proof that your business could be successful and profitable. That’s a high that is hard to recreate. Maybe it’s why so many first-time business owners go on to become serial entrepreneurs.
As you add more clients early on, profitable growth is easy to achieve. But as your business grows further, there is danger ahead. You may be there already, or coming to a tipping point.
In this article, I’m going to describe the U-curve. It’s vital that you understand this principle. If you don’t, you could make a big mistake and be stuck as a small agency forever.
Profitability and growth – bed partners for life
Profit is one of those words that sends shivers of excitement up my spine. It’s what your business should be producing. Profit – the money that remains from your revenues after all expenses have been paid – lets you invest in your business, pay your shareholders, and pay yourself.
Growth happens when you grow your client base, move into new services, maybe expand your geography, and raise your prices.
Even if your current profitability is good, you should always explore opportunities to grow your agency’s business. Growth delivers greater profitability. But you also need to be profitable to grow.
Profits allow you to survive and grow. Growth allows you to increase your profits and thrive. Profits are key to growth, and growth is key to long-term profitability.
So why do I say that growth could be dangerous to you? Welcome to the U-curve.
The U-curve: three stages of profitable growth
Every agency I’ve worked with has experienced the U-curve. It’s a curve that happens when you really start on the path to growing your business, and there are three distinct stages:
What is profit growth? Your business grows but profits fall.
Can you maintain profitability? Profits plateau.
Growth and profit: Business grows and profits grow.
Before you hit the U-curve, pretty much every cent you are paid is profit. This is exactly how my business started. I couldn’t lose. I got work, delivered, and got paid. I added a couple of things to my business along the way – a website to attract more business, for example. But the profits kept racking up.
With the volume of business growing, I added a few more expenses. Someone to do the bookkeeping. An admin person to keep on top of the paperwork. A business phone.
U-curve stage #1: What is profit growth?
There comes a time when you must expand. You’ve got too much business for you and your current small team to execute successfully. You’re working harder than you should, and you’re risking business owner burnout.
So, you hire more people. That’s an extra expense, but you’re sure that your foolproof hiring process has produced great people to help you drive your business forward.
But there’s a problem. It’s going to take time to get your people to be productive. Plus, it’s not only their salaries that you need to find. There are all sorts of other expenses involved, such as:
- The costs of hiring
- Office space
These are a combination of upfront, single costs, and ongoing expenses. The result is that your growth continues, but your profits don’t follow the same path.
It was at this stage of my own agency’s growth that I started to sweat. By the time I got to hire an associate team the feeling I was getting from cashing those checks went from euphoric to desperate. I paid the bills, but now what? Where’s my profit going? You’re at stage 2.
U-curve stage #2: Can you maintain profitability?
This is where the game gets really difficult. Your sales are up, but your profits have collapsed.
It’s here where the danger lies. You can’t see the light at the end of the tunnel. You’ve got more business than you ever had, but all your profit is being eaten up by your expenses.
I got here myself. My business was growing rapidly, but those expenses had crept up on me. The big problem here is cash flow. You can’t pay your people, but your clients aren’t paying you quickly. It’s super stressful. Especially if you can’t pay yourself because you’re waiting on an invoice to be paid.
Why is this stage of the U-curve so dangerous?
Because you will think “Is all this effort really worth it?”
You’ll look back to those days when you first started. When you were first growing your business. Even though you were adding expenses, they were easily managed. The more clients you took on, the more those expenses were spread between them. They didn’t make a big difference.
Your thoughts will turn to wind the clock back on your agency. Returning to how things used to be. When you didn’t have the stress of managing cash flow.
This is when you have got to be strong. Remember why you took on more people and engaged more clients.
Because it sucked where you were before, didn’t it?
Because you knew that, with the right team, you could grow your business even further. To a point where your life and future would be completely transformed.
You’ll be tempted to go back, but this is the time to remain resolute and resilient. Because it will get better.
There are several ways to maintain profitability and drive growth in this stage. These include:
- Using capital reserves
- Foregoing or delaying your own wages
- Hiring remote employees, or allowing people flexible hours and ‘desk sharing’
You should also hire early. By doing so, you can onboard new hires and ensure they are productive as soon as you take on new clients.
U-curve stage #3: Growth and profit
However you do it, hold out for this stage. Remember: cash flow is the real issue, not profitability.
This is the stage where further business growth translates into profit growth. You start to get more from your team, and as you take on more clients, the effect of your overheads starts to reduce.
Starting gradually, your cash flow begins to improve. Then you find that you aren’t worrying quite so much about how you will survive from one month to the next. Often suddenly, your profits start to climb exponentially.
Now the worry isn’t about cash flow. It’s about how to generate further growth through investment in your business. Only this time, with the experience of having ridden the U-curve successfully.
Don’t backtrack on the U-curve
The worst thing you can do is to stay at the bottom of the U-curve. In the valley. It’s here where life is toughest. At this point, it will seem easier to give up and go back. To fire everyone and do it all yourself again. Don’t do it! Doing a U-turn is disastrous.
If you go back, you will put yourself in the position you are escaping from. The instability of your business, your profits, and your earnings being solely reliant on you.
Do you want to know exactly where your creative agency is on the U-curve? Our Business Growth Assessment takes only two minutes to complete and will pinpoint your position. It’s the knowledge you need to develop your profit and growth strategy and build your future.