Practically every nook and cranny you look these days, there is someone starting or looking to start something new in Nigeria. In many cases, it’s not enough to start something new, it really has to big, it has to be HUGE. We love the very idea of Silicon Valley, venture capital frenzy, funding, exits and aggressive growth.
Starting a new venture is hard work. The word hard cannot be overstated. When you do get to start-up, the first battle most businesses come to terms with is staying alive or as some will call it, not running out of cash, not dying a sudden death while awaiting that eureka moment beyond the abyss of failure.
But dear startup, while you engage on that epic and uncertain journey please look after your jaws.
Now jaws is yet another financial ratio to assess the performance of a company. I know, yet another one to digest. Well it’s not a ratio in its true sense and it’s rather easy to understand.
Jaws = % growth in revenue – % growth in cost
Positive jaws – good.
Negative jaws – not good.
It’s that straightforward really. However you would have to look at a trend (e.g. 12 months) to gauge the direction of your jaws and to make any sense of the data.
We are obsessed with revenue growth and as long as you are making money, i.e. what we call revenue :), the future is rosy. Not really.
Jaws tend to aid forward looking analysis and a negative trend even when a business is profitable could spell doom and gloom if the drivers are ignored.
Just like people just don’t drop dead, businesses don’t simply just die or run of cash. Businesses exhibit symptoms, warning signs and a simple metric like jaws could give a good indication of the direction of travel.
In practice, it would however be a number of indicators/metrics and not jaws in its isolation used to assess performance. Nonetheless, as it is such a simple metric, it is one really worth having up your sleeves.
This post first appeared on Peter’s blog.