08 Oct Are your jaws open or closed?
Let’s start with the obvious question: Why the constant references to jaws?
Jaws, in a financial sense, are a visual description of the state of your finances, derived from plotting revenue and expenses trends on X and Y axes. As such, they are an important tool to track your productivity.
If your revenue exceeds your expenses you will have what is termed ‘positive’ jaws, as shown in the picture below. Imagine a wide open shark’s mouth!
If your revenue is closer to, or less than your expenses, the gap closes and these lines result in what we call ‘negative jaws’ . Negative jaws can really bite. Duunnn duunnnn…
From a trend perspective, it is very useful to look at revenue growth versus expense growth on quarter on quarter basis. If your ‘jaws’ are getting wider, this is good news, but if they are starting to narrow or close, this signals an imminent loss sometime in the future, meaning it’s time to take stock and reverse the trend.
The answer: Sometimes nothing, sometimes everything! Many a company has been tripped up by doing calculations based on profit, rather than actual cash flow.
Let’s start with a simple demonstration of the difference between the two.
Encouraging Positive Jaws. In a nutshell, the wider the jaws, the happier you should be. Positive jaws signals strong productivity.
So how do we encourage this? There are two key areas to focus on to achieve positive jaws. Firstly, work to grow your revenue faster than your expenses. Secondly, ‘sweat’ your assets as hard as you can to maximise your return. By this I mean accomplishing more with the same amount of resources, or achieving higher output from the same investment.