Wednesday, July 1, 2020

What looks like a surge is really just the pinnacle.

Over the years there have been many times when I've let myself think that Pegasus Books might be on the verge of turning a real profit. Not just paying the bills (including a modest wage for me, which the IRS counts as profit), but actually some cash left over.

***Warning--this is totally in the business weeds.

Every...damn... time, that possibility has receded before my disbelieving eyes.

No more. I've come to recognize that there is a inevitable pattern to it. Whenever I reach that point where it appears a profit is possible, it is actually a sign that things have probably reached a peak and the downhill slope is imminent.

The danger is that you spend too much at the peak, which means you get a high flow of material coming in after sales have already begun to drop. I've never figured out why this happens--perhaps the surge creates competition, or people are most eager just before they stop, or expenses like rent and utilities rise. All I know is that it is a consistent pattern.

The only real way to make extra money is to siphon it off on the way up--but the drawback to that is that you inevitably slow the growth. Whatever is fueling the growth will usually soak up all the cash, unless you are willing to forego the growth, which I have never been willing to do.

In hindsight, this has kept me in business, but has kept me from being terribly profitable. So if longevity is my goal, then supporting the growth curve is a good idea. I've learned that you can only survive a steep drop in business if you are operating at a significant level above survival.

That is, say you need to earn $XXX to stay in business, (breakeven point) and you spend all your cash on pushing it to $XXX times 1.5. What this does is gives you a cushion for a drop of a third. However, you haven't set any money aside for reserves. This sounds bad, but if you budget correctly, you can weather it.

On the other hand, let's say I need to do $XXX to stay in business, and I gently push it to $XXX times 1.25. Meanwhile, I take profits by not growing as fast and high as I could. But the problem is, if there is a drop in sales of a third or more, I'm in the hole with no real way to get out of it. The breakeven point isn't achievable, except by drastic cutting.

What about the cash? By my calculations, the cash profit--if you managed to hold onto it and not spend it on something else--will never be enough to cover the shortfall.

So the trick is to recognize when you are peaking and start looking for the inevitable falter.

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