Scalability is a characteristic that describes the capability of a business to perform well even when the workload expands. Scaling a business means having effective ways to increase its performance even when it is tested with larger outcome requirements.
Scaling any business depends on two factors: capability and capacity. Ask yourself a few questions; is your business capable enough to grow? Does it have the capacity to accommodate growth? Can a minor confusion becomes the reason for your business to stumble? Orders falling, miscommunication, insufficient staff, these reasons will leave you with nothing but unhappy customers.
In the context of any business, scalability describes the ability of the business to grow without being hampered by the available resources when production increases. Technology has allowed the idea of scalability to become more convenient in recent years as it has made acquiring customers, expanding markets and scaling the business much easier.
Growth vs Scale; Knowing the Difference
Business growth is about increasing top-line revenues at any cost, whereas scaling a business is about increasing revenues while minimizing your costs, effectively improving your bottom-line or profit margin. Economists refer to this latter phenomenon as achieving “economies of scale.”
Most entrepreneurs are vision-driven and they want to fill a gap in the market or solve a problem. The nuances of growth vs scale are rarely top-of-mind until they experience growing pains.
Nearly every business owner would like to see their revenues grow because (on the surface) growth indicates that you have built a successful company.
However, growth for the sake of growth is a small game, and it may not be a sustainable business model. If the only way you can make more money is to sell and deliver more of your product or service, you will eventually hit a tipping point. You will max out on the amount of business you can accept, given your available resources.
Making a Choice About Growth
When this happens, you will have to make a choice. You can:
- Remain a small business and work unreasonable hours which sacrifice your mental health, profits and/or the quality of what you deliver,
- Adjust your pricing model, or
- Consider hiring more people and invest in other resources to add revenue and growth.
Adding resources will increase your costs and your profits to go down, at least temporarily, until you ramp up sales and begin adding revenue to cover those costs.
Often a business owner’s only motivation is to achieve a certain income level so they (and their team members) can live comfortable lives. This is perfectly acceptable if you are comfortable repeating this cycle of adding resources at pace with your growth.
Professional service organizations, where the primary source of revenue comes from selling labor, are a common example of this. If they don’t find a way to scale growth, the only way to take on more clients is to hire, so the cycle continues.
Growth as an Entrepreneur
Most growth-minded entrepreneurs have bigger ambitions. It’s the nature of the beast! They want to build a business that will grow in value then eventually cash out and pursue other goals. Such entrepreneurs must understand growth vs scale and adopt growth strategies that will result in a successfully scaled business. This will improve their ability to earn a profit today and command a good price when they are ready to pursue an exit.
Scaling Your Business
Scaling a business means that you grow your revenues and increase your profit margins at the same time by finding ways to be more efficient. This empowers you to continue adding customers and delivering the same level of service without incurring undue costs.
However, like most things worth pursuing, scaling a business is not easy. The methods for doing so will vary from one company to the next, and you can expect some ups and downs. But, if you know what you’re doing, this is what the growth curve for a company that has achieved scale might look like in comparison to one that has not.
As you earn more revenue, your costs still go up but at a slower pace because you’re finding economies of scale. This leads to a higher profit margin. Of course, there may be times when you must make an investment, which will affect your profit margins for a while, but that’s normal and expected. So, what actions can you take to build a business that can achieve scale vs growth alone?
How to Scale Business Growth
There are many ways to find efficiencies in a business. Earlier, we pointed out that you might be able to reduce the cost of your product or service by negotiating for volume discounts, but there are plenty of other things you could do, such as:
- Reduce the Cost of Your Product or Services
In addition to reducing the cost of your materials, you could find cheaper sources of labor, negotiate better shipping rates, or find ways to reduce your rent or equipment expenses. - Invest in the Value of Your Product or Services
On the flip side of reducing costs, you can invest in making your product better. Perhaps you can add more features or capabilities, increase your level of service, or train your employees. Such improvements would allow you to charge more, which should boost your bottom line. - Build Strong, Efficient Internal Processes and Procedures
Nearly every area of your business could benefit from establishing repeatable, predictable processes and procedures. For instance, in your finance and accounting department, ensuring that you bill customers automatically and impose penalties for late payments could save you money. Or you could create an expense reimbursement policy instead of leaving spending decisions to the discretion of your employees. - Invest in Productivity Enhancing Technologies
The right tools can significantly improve your productivity. For instance, with the right technology, you can track customers throughout their life cycle with your company. Besides making your marketing and sales efforts more effective and efficient, such investments can also flow through to your customer service team. This will allow them to present a more unified presence to your customers, improving your reputation. - Allow for Specialization
Hiring full-time employees and expecting them to be a jack-of-all-trades isn’t always cost-effective. Such practices can lead to costly errors and burn-out. Instead, consider hiring specialists to lighten the load and improve your efficiency. If you don’t need (or can’t afford) to hire full-time specialists, outsource some work to freelancers. That way, you can get the expertise you need at a lower cost.
These are a few ideas owners should consider if they are serious about exploring the opportunities for growth vs scale within their business. Work with their finance team to develop a budget and a detailed cash flow forecast. This exercise forces you to examine how cash flows in and out of your business so you can spot and remedy problem areas.
In Conclusion
Depending upon your long-term goals, you will be able to determine growth vs scale. If you started your company because you love what you do, enjoy the people you work with, and simply want to make a decent living, growth without scale is fine. However, there are risks to such a business. For example, if the owner decides to retire, you lose a big customer, or changes occur in the market, the entire company could be at risk.
If, however, you want to build a thriving organization that will provide value to its customers, employ a lot of people, and live on long after you (comfortably) retire, you must seek economies of scale. Such a business grows in a sustainable, cost-effective manner. It can weather the inevitable ups and downs and deliver a return to its stakeholders year after year.
If you want to explore your growth or scale options, contact me for a free 15 minute consultation! 440-212-4987.