It’s not uncommon for entrepreneurs to use the terms “growth” and “scale” interchangeably when talking about adding revenue to their small business. The terms do have a similar meaning with a critical difference.
Growing a business means that a business owner is adding revenue by adding more resources and higher costs to their operation. This could mean bringing on new clients and customers by adding a new location or building, purchasing new equipment or hiring more employees to meet the needs of those new clients.
So, what does it mean to scale a business? This is when a business adds revenue at a much faster rate than they are adding new costs and resources. In other words, they are adding new customers and revenue sources without adding new buildings or employees. Instead, they’re making more efficient use of the employees and resources they already have.
Scaling a business can be very difficult for a startup company to accomplish. In the early days of a new small business, they are really trying to grow their brand by adding more resources, hiring employees and growing their revenue sources. A more mature company that has resources and employees already in place is best suited for scaling their business.
What Does Scaling a Business Look Like
For a young business, members of the sales team typically wear a lot of hats for the company. Those employees are probably doing much of the administrative work, including the invoicing and any paperwork that goes along with making sales. This limits the amount of time they have to bring on new clients to add revenue.
For a business that already has additional employees, they can scale their business by passing some of those tasks off to a secretary or an administrative assistant. This will help enable the sales team to be more efficient and bring on new customers without the business owner needing to hire a new salesperson.
In another example, a manufacturing facility could scale their business by adding an additional shift to their production schedule. While this would incur costs of adding employees to staff that shift, as well as an increase in overhead costs like utilities, they would still be utilizing resources — like the building and equipment — that they already have. This would be much less costly than adding a new facility and buying new equipment to add revenue, likely resulting in a higher profit margin.
How to Know When to Scale Your Business
There are two main questions that a small business owner, such as yourself, should ask while considering when to scale your business:
1. Can I gain more revenue?
Ask yourself if there is a need for more of your products and services in your market. Sometimes a business may feel that they have more business than they know what to do with. If you feel this way about your business, this is a good sign that you are ready to scale.
2. Can I achieve this with the resources I already have?
Making this determination is going to require a conversation with a business banker, your accountants and your sales employees. Ask them if there is anything you can do to make their jobs easier so they can take on more clients and customers. They are going to be the best judges of whether or not they will be able to accomplish this and if there is a need for more of your services in the market.
Get Your Business Banker Involved
Many small business owners feel they need to grow or scale their business to stay viable. Your business banker can have an honest conversation with you to help you decide when to scale your business and if it’s the right move.
A business banker can provide you with reports to show how your revenue per employee measures up with the rest of your industry. Examples of these reports include Dun & Bradstreet First Research Reports and Moody’s Analytics. If you’re already doing as well as or better than the industry average, scaling your business may not be necessary. If you’re below the industry average, your business banker can help you assess potential areas of improvement so you can scale your business.
To start exploring the possibility of scaling your business, start a conversation with a business banker at Northwest Bank today.
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