When your business is generating leads and customers, and your employees are committed, your business processes are running smoothly and your business is profitable, would you want to grow it bigger?
Some business owners like to keep their businesses small, and they fear expanding their businesses, for fear that it becomes too large and it may fail.
Indeed, the Bureau of Labor Statistics has revealed that 45% of businesses fail within the first five years. After 10 years, it is possible that more than 90% of small businesses may fail.
Now you understand the fear, and perhaps you too are fearful of growing your business.
The reason why businesses fail when they start to scale is that they are not ready to scale yet. They are scaling to solve business problems.
Suppose a small business owner is making a slight loss in his bottom line, and he is thinking that scaling will give him economy of scale thus reducing his business cost. I can guarantee you that should he scale, his business will definitely fail.
That is because his cost will not go down, indeed his expenses will go up, his minor loss will be transformed by scaling to a major deficit and large scale losses. He is NOT ready to scale.
As a Business Coach, I have seen business owners thinking of scaling to solve problems of marketing, managing employees or operational issues and they never, never succeed.
Before you scale, be sure your marketing, manpower issues are basically settled, and your operations and your value offer is helping you to turn in a healthy profit.
Then subject your business to a financial health check, for most of the time, financial indicators will tell you whether your liquidity is healthy, (you know it from your cash flow already), whether you are overleverage ( you know you have too much debt) and whether your operations are efficient. ( you know you are not getting the revenue compared to your competitors)
Hence I have included a handout on financial ratios that help you to assess whether your business is healthy or in varying degrees of coma, ready to give up and die. (see download on Financial Ratios)
In doubt, always talk to an accountant or to your coach.
Sometimes to scale, you may have to borrow or accept investors to come into your business. If so both lenders and investors will scrutinise your financials. When you are not ready, lenders will not lend you, but investors may cannibalize your business. So beware!
A review of your resources is needed at this stage, you have to ensure that you have the financial, manpower, physical space, supply chain resources in place before you scale.
You do need to ascertain that there is ample room for growth in your marketplace by doing a competitor analysis combined with market research to make sure that growth is feasible.
Your business operations must be operating at or almost full efficiency and full capacity, and if this is the case, your business must also be organized into systems that make scaling effective.
With business systems in place, you have to decide how, when and where to scale. You can scale by making your business unit larger or spawn a number of smaller business units. Other things to consider is whether you wish to scale within the same geographical or demographic locality or to a different one. Or scale up with a different but related product and/or service.
It is often useful to think of your business operations in terms of levels. Operating at your current level with a certain amount of physical space, and a certain number of staff, you can at full capacity produce, let’s say x units of products or x instances of service.
Assuming that you double your physical space with a corresponding increase of staff, you can increase your capacity by perhaps 100 to 300% for example.
In other words, scaling is always from one level to the next higher level, or if you are scaling into another product or service to another business unit.
So, that’s how I help small businesses to scale. We review the financial data first before looking at other factors, and if you are ready to scale, then I help them to decide on the strategy of scaling and how to implement. What I am saying is that you are better off if you talk to somehow: preferably a business coach or consultant who can objectively advise you.
Avoid the pitfalls I have pointed out earlier as well as the various cognitive biases that humans tend to have. If you want it so badly, and you think you have to do it, it is difficult to dissuade you. A third party hopefully can inject some common sense.
Besides growing your business, scaling up has the following benefits which I am repeating here for you as a reminder.
- You achieve economy of scale, your cost per product/service gets reduced. (but note my earlier caveats
- You can deliver quality products/services in different localities and perhaps niches.(that is perhaps the greatest advantage of scaling)
- You are better placed to cope with risks and disasters.(that’s because of different localities having different local conditions)
- You can compete better whatever the circumstances.(same as previous reason, so your business is more resilient)
When you have more than one business centre, each of these centres can cushion the others. Thus your existing business unit can cushion a new business unit by providing some support in terms of inventory to kick off sales, for example.
Or some steps in the SOPs that require an investment of equipment may be supported in the original business unit through completing part of the SOP there before transporting it to the new unit for finishing.
There may be manpower support by seconding key staff to seed operations in the new business unit. In short, there are many possibilities to give the new unit a head start.
Usually scaling into an entirely different product is undertaken because the business processes underlying the 2 products are similar, and the skills required are essentially the same, so the investment is not so exorbitant. Thus a manufacturer of disk drives can easily make a mobile phone for example.
Nowadays with automation now being implemented in every industry, you must implement this early in your business as much as possible. You do this when you are improving and refining your business processes.
Once you have implemented automation to some extent, scaling up with automation strategies is so much easier and faster. You can grow to greater heights, whether selling products or services. The upside for greater profits is only conditioned by the market size.
You are likely to be automated already to some extent without realizing it. If you are using extensively PCs, notebooks and iPads, you are. If you employ digital marketing, iPads for customer orders in F&B, and using apps, social media apps, internet to connect with customers you are on the way already.
Be a smart business owner, learn how to work ON your business instead of IN your business. Work on your business process until they run on auto-pilot and automate early. You have more free time to plan the growth of your business and more time for yourself and your loved ones. Isn’t that what you aspire for when you become an entrepreneur?
My aim in writing this series of articles is to encourage you to business excellence through the introduction of topics intended to help you build a better and more resilient business. You may or may not have noticed, but there is a strong undercurrent of strategic decision making and implementation.
If you share the ideals of business excellence, my invitation to you is to work with me, and I shall do my best to help you realize your entrepreneurial dreams and work ON your business, not IN your business.
For myself, I too have worked with other coaches on my business, and I think I am the better as a result. Some people think that using coaches are expensive, but don’t you think that learning from your own mistakes is even more expensive? Some business owners never recover from their mistakes and that’s why they fail.
So do not hesitate, schedule an appointment to talk with me. There is no obligation for you to get me engaged as your coach, but at least give yourself that consideration.
-To your business success,
Dr Douglas Kong