‘Scaling’ a business means growing it significantly in a way that achieves greater profitability.
When people talk about growing a business, what they actually mean is scaling it. Growth means having a higher turnover, whereas scaling is about that and widening profit margins. If your overheads increase at the same rate as your growth, you’ll only ever make the same profit margin.
The challenge of scaling is to increase growth at a much higher rate than costs, and so deliver sustainable, increasing profit margins. Achieving this is what turns a startup into a thriving company.
Deciding to scale up is a big step, so make sure you’re ready for it – and that your market is ready for you. Some of the common hurdles to overcome include:
Scaling before perfecting product-market fit
A mistake that many founders make is beginning to scale their startup too soon. Some start to increase production without being clear who their customers actually are (here’s a hint: it’s not always your users!) or without knowing if the market has sustainable demand.
You need to know your market before you scale up. If there isn’t demand for your product, will scaling up your production generate higher profits?
Trouble meeting demand
Conversely, you might have exactly what the market needs but have difficulty satisfying demand.
Are you able to create what you’re selling quickly enough to keep up with, or have enough of the right staff to service, increased demand? Work closely with suppliers and consider hiring extra pairs of hands.
Lack of funds & cash flow problems
Do you have the money to scale up your offering? If not, where will you source funding? If you choose investment, be aware that this involves reducing your share of the business and hence your share of any profits. Conversely, bank lending will have to be repaid, which could hamper future growth. Weigh up these risks against the potential rewards of scaling – or wait until you have sufficient resources in the business.
Cash flow issues can be especially common when you’re increasing production but still trying to drum up demand.
Hiring the wrong people
People are your biggest asset, but they are also your biggest overhead. When recruiting always take the utmost care, and only take on new people when it’s clear you will struggle without them. If necessary, engage a professional recruitment firm to ensure the best fit for your business.
If you’re hoping to increase demand, you’ll need to get the message out there. Many businesses fall down at this step by thinking that more marketing = better. But often this only means working harder and spending more money without necessarily profiting from it.
Instead, create a new marketing strategy for scaling, with targets and clear steps. Focus on creating long-term demand.
Struggling to manage a larger business
You will face significant new management challenges as your business grows, and you will not be able to maintain the same close level of control as you once did. Learn to step back and take a more strategic role and consider taking on extra help (such as other co-directors, a finance director or a non-executive director) if you start to feel overwhelmed or in uncharted territory.
Inadequate accounting systems
Managing your accounts gets more complicated as you scale up, and often there is also a tighter window on your cash flow. At this point you definitely need a skilled accountant (either in-house or outsourced) and quality systems to ensure long-term financial stability as you scale up.
Next time we’ll outline some tips about leading and growing your team through this process and what you need to do to secure that all important financing.
DHKN’s Corporate Finance and Advisory teams work with business at all stages of development and we have helped many through those difficult scaling years to be come successful sustainable enterprise fulfilling the visions of their founders.
For an informal discussion with our experts about how we can help your business match your ambition, contact me at firstname.lastname@example.org.