Do you want to grow your business?
Or do you want to scale it?
About 50% of start-ups fail within the first 5 years, and only about 25% make it past 15 years. Even in the most profitable industries in the US, such as commercial banking and portfolio management, there is hardly a guarantee of finding success.
One of the primary reasons for foundering is a weak business model. Still part of that is failure in scaling a business – and more specifically, failing to understand growth vs scaling.
Difference Between Growing and Scaling a Business
Growth and scaling are related, but are not the same thing.
Business growth can be thought of in linear terms: increasing top-line revenues through the addition of new resources (technology, capital, or people).
Scaling a business, on the other hand, refers to increasing revenue without substantially increasing resources, and while minimizing costs. Hence, it improves your profit margin. This phenomenon is referred to as “economies of scale”.
Scaling can be done en masse sans extra effort, or with minimal extra effort. For instance, whether you send an email to 1 person or your entire email list, your effort basically remains the same.
Let’s take a slightly less simple example. Suppose you make apps for $100 and sell them for $150, without changing either side of the equation.
In this case, your business can grow, but not scale, since your costs are rising at the same rate as your profits and revenues. However, if you reduce your costs, you could scale your business and make more profit.
Generally, growing a business will give you about 5%–10% organic growth year-on-year, while scaling a business will give you roughly 2–3 times the growth in 3–5 years. Furthermore, entrepreneurial involvement will be far greater when growing a business.
Growing a Business
Growth is often considered the hallmark of a successful company. While it usually refers to the increase of revenue, it can also refer to aspects of a business that are growing, such as the number of offices, employees or clients. Almost always, these aspects are connected to revenue growth.
However, there are some concerns associated with growth:
Constant growth is difficult to sustain
Growth for the sake of growth is not necessarily a sustainable business model
For instance, consider an ad agency that currently caters to 10 clients, but would like to take on another 10. More money will certainly be brought in by increasing the number of businesses the agency sells to.
Having said that, it probably won’t be able to manage this without hiring more people. Thus, financial growth is achieved at the cost of larger losses.
If the only way your business makes money is by selling and delivering more of a service or product, it will eventually reach a tipping point. The business you can accept hits a block due to availability of resources, or lack thereof.
Having said that, growth can bring various advantages to companies, including greater profits, increased revenues, and the ability to implement economies of scale.
As businesses grow, they gain opportunities to expand their service/product offerings, enter new markets, and increase their customer base.
Growing a business can create opportunities for innovation and differentiation from competition.
Growth can lead to the ability to attract and retain the best talent, and increase market share.
Scaling a Business
Scaling a business is about minimizing resources and maximizing efficiency while serving more customers, thus leading to increased profits. To achieve this, businesses may need to invest in training, infrastructure, or other resources.
A good example of this would be SAAS (Software-as-a-Service) companies. There is a large up-front investment; however, after launch, n number of customers can be served.
How to Scale Your Business
It is important to understand that scaling requires significant investment and planning, and is not always easy.
Often, businesses that are able to successfully scale up operations have a strong foundation of efficient processes, financial stability, and replicable capabilities.
Having said that, there is no one-size-fits-all approach. There are certainly a few things businesses can consider, such as:
Building efficient internal processes and procedures: Establishing predictable and repeatable procedures and processes. For example, billing customers automatically & imposing penalties for delayed payments.
Investing in technologies that enhance productivity: Investing in tools that improve productivity, such as tools that track customer lifecycle.
Reducing costs of services or products: Reducing costs of materials, rent, and equipment, negotiating shipping rates, finding cheaper labor (even through outsourcing).
Increasing value of services or products: Investing in enhancing your services or products. Can include training your employees, adding more capabilities/features, increasing level of service, etc., which in turn allow you to charge a higher price.
Hiring for specialized roles: Expecting full-time employees to be jacks-of-all-trades may not pay off in the long run, as it can lead to burnout and expensive mistakes. Instead, it can be worthwhile to hire specialists. For example, you can hire NextGen Accounting for that reconciliation backlog you’ve been staring at for too long. We specialize (and revel) in reconciling vast amounts of data with our patented reconciliation software CrushErrors – the more, the better.
Growth vs scaling: which is better?
If you’ve stuck around till now, you’ve probably understood that the answer will depend on your business and personal goals.
Growing without scaling is fine if you simply want to make a decent living and enjoy what you do. However, it is important to be aware of the risks of such a business; if you lose a big customer, changes occur in the market, an owner decides to step away, etc., the entire venture could be at risk.
But if you want to build a thriving company that employs many people and lives on long after you retire, scaling is the way to go. Such businesses are more resilient to unexpected changes and circumstances, and tend to grow in a more cost-effective, sustainable manner.
At NextGen Accounting, we understand the difficulties of both growing and scaling a business. That’s why we offer services that will help you focus on running your business. We provide credit card reconciliation services, bank reconciliation services, audit and anti-fraud assurance, financial consulting, and financial reporting. Our services are specially tailored to firms with vast amounts of data that are extremely difficult to reconcile.
To give you the fastest and most accurate reconciliation, we use our patented software CrushErrors, which you can also obtain as a product if you’d rather conduct reconciliations in-house.
NextGen Accounting’s management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC. Contact us today for reconciliation solutions or book a free demo if you’d like to get CrushErrors!