Growing a business is the primary objective for most business owners. Boosting headcount, operations, customer base, geographic locations are all positive developments. However, these developments come with a catch.
Why? Because in conventional growth mode, all these objectives require correspondingly increased resources – revenue, people, cash – to fund them. You make more, but you need more cash and spend more of it to grow, and eventually what mostly happens – thanks to the law of diminishing returns – is that your growth rate slows and may eventually even halt completely.
In fact, in many businesses, growth can also cause a company to go bust, as cash can run out despite making a profit.
So, what’s the alternative? After all, no business wants to stand still…
Scaling up: go beyond growing
Scaling – the ability to grow without being held back by increasing costs.
However, it is true to say that some business types will find it inherently difficult to achieve this winning formula. Companies that offer professional services, like solicitors, or surveyors, or advertising agencies, for example, will always have to deal with this problem.
Why? Because since they are businesses based around extensive human expertise and advisory functions, taking on more clients inevitably leads to hiring more people to support them.
This could also lead to increased costs and greater cash consumption since employee compensation is often paid before customer payments are received
But the business type isn’t the only factor involved.
Some businesses find themselves in the growth trap rather than the scaling space quite simply because they didn’t construct their business plan realistically.
If you haven’t planned out how to increase the amount of money you’re making without making a comparable impact on your costs, the chances are your growth will take a hit and may even stagnate. You’re certainly unlikely to scale, in any event.
So how does scaling work?
When a business can increase its revenue with little or no increase in the cost to produce it, the company has achieved scale-up.
The idea of scale was first associated with manufacturers that found ways to standardise and replicate their processes to achieve those all-important economies of scale. In doing so, they were able to lower the cost per unit, achieve operating leverage and spread their fixed costs across greater output.
The concept of scaling is, these days, mostly associated with technology companies and similar businesses that started out with a core set of assets they were able to leverage at a low cost once they found a market. Think of a cloud computing provider, for example: much of the process of bringing on board new customers – whether they’re using the service to type letters or plan major infrastructure programmes – is generally frictionless, usually doesn’t require the acquisition of further physical servers, and costs nothing to ship.
Is your business scalable?
Smaller businesses across many sectors can and do scale effectively.
To maximize returns, numerous businesses can explore areas of their operations that can be standardized, effortlessly replicated, or even automated. By doing so, they can identify scalable components that cut down costs.
Self-service portals; automated invoice generation, delivery, and follow-up; the use of artificial intelligence (AI) to handle, sort, and route customer enquiries; cutting salary bills by outsourcing processes like Finance… all these can support a business model in which each sale effectively costs less than the sale before it – the hallmark of successful scaling!
Where you might need help…
The challenge for business owners, though, is that scaling requires being able to spend more time working on their business than working in their business. Business owners who prioritize achieving traditional growth often become preoccupied with the tactical intricacies of their day-to-day operations.
In life and business, it takes another pair of eyes, often from someone who has done it before, to spot the issues and the opportunities, and help you do things differently to rise to new aspirations.
At EFM, our outsourced Finance Directors (FD) and other Finance professionals pride themselves on being more than just accountants, bringing strategic insight to the role, and helping to reshape business operations to get you through growth and beyond – if that’s a destination your business is capable of reaching.
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