Why Scaling Costs in a Growing Business is so Hard.
(And how to overcome the challenge)
Owners of startups and growing businesses will know just how hard scaling costs is in a business. As revenue grows you need more resources (people, equipment, consumables) but it can be challenging to grow costs at the right pace.
Spend too little on resources and you do not have enough resources to meet customer demand, and your revenue growth falters.
Alternatively, spend too much and you impact profit and more dangerously cashflow – putting the business at risk of failing due to being overstretched.
So how do you know how much resource is enough?
This is the problem of Scalability that all growing business owners tackle constantly.
What is Scalability?
Investopedia provides an excellent definition about scaling costs:
Scalability is a characteristic of an organization, system, model, or function that describes its capability to cope and perform well under an increased or expanding workload or scope. A system that scales well will be able to maintain or even increase its level of performance or efficiency even as it is tested by larger and larger operational demands.
I love this definition as it gets to the heart of the challenge – ‘a system that is capable of performing well under expanding workload’.
How Do I Create Such a System in My Business for Scaling Costs?
#1. Have A Plan
Visualize your game plan across the next 3 – 5 years.
- What is your business going to look like at each stage of growth?
- How about your end state finances as you reach business goals and milestones?
What are the key actions to reach each of these milestones?
- To be successful at scaling your business you need to have a good strategic plan and back this up with operational plans.
#2. Understand Your Costs – Scaling Costs
To be able to scale your costs you need to first understand your costs.
You should be able to:
- Identify your fixed costs (constant or slowly increasing with growth) and your variable costs (change in portion to growth of revenue).
- Know which expenditure lines are must have and which are more discretionary.
- Do not under call how much you might need to spend on growth – for example marketing, external support, people costs.
- In summary, understand the drivers in your cost base.
To successfully scale you need to have a method of calculating when resource needs to be added to your business (people, equipment, consumables etc.). Some industries like Contact Centres have predetermined models that calculate how many Contact Centre agents you need to employ to answer a certain number of calls. Most do not. Your business needs to understand your industry model – for every $x of revenue I need to employ $y of extra resource.
Taking your plan, you also need to map out when you are going to need extra fixed resources. So when might you need a bigger premise, when might you need to hire a receptionist or another marketing person and so on.
#3. Have Strong Foundation Systems and Processes
Talent is often the key difference in the success of an early business. A great idea and talent to drive it to market. However, talent is not the key to scalability. Good processes and systems are.
As we grow, we put in place quick, cheap, and easy systems or processes. We buy a simple SaaS piece of software to perform functions like website sales, accounting, customer databases. However, in the long run these may not be the best system to run a growing business. The most common challenge I find with businesses who come to me for help around scaling is that the foundation systems and processes are not in place. In addition, the various systems do not talk to each other.
A good set of foundation systems and processes focuses on:
- Simplicity (easy to say – hard to deliver).
- Automation (which helps scaling).
- Customer Service (which often gets lost in the noise of scaling).
- Connectivity (systems which talk to each other).
You need to think ahead and plan for the types of systems you need to run your business in 3 – 5 years’ time, and not just now. If you are not a process expert, then seek advice from those who are.
#4. Measure, Measure, Measure – Scaling Costs
What you cannot measure, you cannot see. Any successful expansion needs to include data driven insights.
You need to be able to:
- Measure progress against the plan.
- And, measure and understand the drivers in your cost base.
- Then, measure the success of your processes and systems.
- Finally, link all of this together into meaningful insights.
Your measurement system needs to tell you when you need to add the next round of resourcing into your systems and processes so you can do this in a planned way, rather than a last-minute rush.
#5. Ask For Help – Scaling Costs
The most precious commodity for a business owner is time. As your business grows you become more time poor. With growing businesses, the demands on the business owner become greater as you need to spend more time working on the business and not working in the business.
What we also find is that businesses with up to 50 people are staffed by generalists – people who can turn their hand to a range of tasks. Once your business grows beyond 50 people there is often a need to bring in specialists. The volume of work, the complexity of transactions and the nature of work mean that more specialists are employed. Therefore, task gaps are created that once might have been filled by a generalist.
This means a growing business needs help. As a business owner:
- Bring in part-time senior resources to help with complex growth problems (marketing, finance, human resources, sales).
- Reach out to your networks for ideas and support.
- Bring in short-term resources to help with projects.
- Get external support for non-core activities (marketing, finance, human resources) and hire people for core activities (sales, customer service etc.).
#6. Watch Cashflow Like a Hawk
Times of expansion can add to cashflow pressures in a business. You need to bring in resources before you have received payment from customers. The best understanding of costs and the best plan in the world will come apart if you are not watching cashflow.
Watch your cashflow like a hawk. Do this by:
- Having a good 12 – 18 week cashflow forecast.
- Ensuring cashflow is reviewed and updated weekly or bi-weekly.
- Having a longer term cashflow plan linked to your business plan.
- Sourcing the right level of funding for your expansion plans; and
- Finally, not underestimating what it will cost you to expand.
Normally businesses come unstuck as they did not realise what it would cost to expand or had not sourced the funds early enough.
In conclusion, these are just six quick ways to help you get on top of scaling costs in your business and successfully growing.
For more suggestions about scaling costs in your business – or for help with other business challenges – contact Fiona Harnett at MacGregor Jamee to arrange a needs assessment.
MacGregor Jamee helps SME owners increase revenue, reduce costs, and improve operational efficiency.
We do this by providing them with the sort of high calibre chief financial officer, business mentoring, leadership coaching and business consultancy services often only available to large corporates.
To arrange your free assessment contact Fiona Harnett on
09 5255735 or email@example.com.
Or visit https://macgregorjamee.co.nz/
For more insights follow our regular posts on LinkedIn