Scaling a Business: How & When to Do It
Many entrepreneurs start a business with the goal of one day running a large company. While you might start small, you can dream big and create a plan to expand — or scale — your business.
“Fundamentally, scaling is about thinking there’s more profit to be made in a bigger market,” said Jorge Guzman, management professor at Columbia Business School in New York. “Scaling is about meeting a higher level of demand.”
However, not all businesses have what it takes to make a bigger mark, he said. The success of many small businesses depends on factors that may not be replicable on a larger scale, such as local culture or personal relationships with customers. For instance, a small neighborhood restaurant may not be able to find the same success in other locations, he said.
But if you think you have a scalable business on your hands, you could enjoy the benefits of expanding your company. Scaling gives business owners a chance to break out of the time-consuming owner-operator role, said Bill Gallagher, business coach and host of the podcast Scaling Up Business. Scaling can allow you to turn over day-to-day tasks to managers or create a pathway for your exit if you’re interested in selling the business, Gallagher said. It can also be a way for your company to become a major player in your industry, perhaps even on a global scale.
Scaling vs. growing. Growing a business is similar to scaling, but the difference lies in how much it costs you to expand. Scaling requires you to increase revenue without upping your expenses too much. On the other hand, your revenue and expenses rise simultaneously while growing.
Continue reading to better understand the process of scaling a business. We’ll help you determine if it’s the right strategy for your company and when it might be the appropriate time to expand.
How to scale a small business
Any method of increasing revenue and profit to grow the business can be a way to scale, Guzman said. For example, you could invest in more machinery or product development.
When starting the process of scaling your business, here are a few steps you can follow to stay on track.
1. Put together the right team.
One of the key components of scaling your business is increasing your headcount to support a larger operation, Gallagher said. There are a few ways you can add more people – adopting a franchise model, bringing on contractors or hiring employees, Gallagher said.
Check out industry benchmarks to decide how many people you need to handle the demands of your business. Recruiting tools and hiring systems may be a worthwhile investment as well.
Adding more members to the team can be frustrating for entrepreneurs who are used to doing things themselves or with a core group of co-workers, Guzman said. You’ll need to be patient when working with people who have varying skill sets, especially when they’re new and learning the ins and outs of the company, he said. We’ll discuss strategies below for how to budget for a bigger staff until new products or initiatives begin to pay off.
2. Develop your strategy for growth.
Communicate before expanding, Gallagher said. Develop a simple and clear strategy that employees, customers and vendors can understand and embrace, he said.
“This is something that’s really a simple idea that differentiates you and has people wanting to do business with you,” Gallagher said.
Although you want to stand out among competitors, you should also keep your offering concise, Gallagher said. If you specialize in a certain service or industry niche, you would have a better chance of connecting with customers and scaling the business.
“One of the key decisions right at the beginning of scaling up is focusing on one type of core customer and one core set of brand promises,” he said.
3. Create a game plan.
Once stakeholders are on board and you’ve identified your target audience, Gallagher suggests taking these three actions:
- Set priorities: Narrowing down your to-do lists to your most important tasks would improve the growth of the business.
- Determine metrics: Focus on specific metrics that you want to use to measure business growth, such as income statements.
- Improve staff meetings: Schedule proactive, effective meetings like daily huddles or monthly all-hands meetings to keep your team up to date on the scaling process.
The overall goal is to make the most of each day, Gallagher said.
“If you focus on the most important thing each day, you can massively improve growth,” he said.
4. Figure out how to pay for it.
When possible, it’s best for a business to fund growth internally, Gallagher said. You wouldn’t have to worry about borrowing money or bringing on investors. Being able to rely on your own revenue to scale would also indicate strength in your business, he said.
“If it’s just become weak, messy, inefficient, and you solve that problem with some cash that you borrow, you’ve covered up a bad business,” he said.
However, most small businesses will need some outside sources of capital to fund growth, Guzman said. It can be difficult for a business to scale using only reinvested profits.
“Usually, scaling requires you grow first and then you make more money,” he said. “Not the other way around.”
You could borrow money in the form of a small business loan or line of credit from a traditional bank or an alternative lender, or you could seek equity from outside investors to boost your scaling efforts, Gallagher said. Both types of financing come with costs, whether it’s interest on a loan or loss of total control of the company to investors, he said. However, borrowed money tends to cost less than equity in the long run, he said, as long as you can handle the interest rate and repayment terms.
“If we can do short-term financing, we’re in pretty good shape,” Gallagher said. “You just have to be careful.”
Is it the right time for you to scale?
If you’re thinking about scaling your small business, you should first ask yourself why, Gallagher said. You should be able to articulate your long-term goal for your company and the reasoning behind that goal, he said. That would help you understand what you want to achieve by scaling your company.
Then, you should turn to your core customers to understand how they interact with your business and how you can expand your customer base or have existing customers conduct more business with you, which is a main piece of the scaling process, Gallagher said.
To better understand customers’ perception of your business, consider asking these three questions:
- When did you first choose our business and why?
- Based on your experience with our business, what do we do that’s great and better than anyone else?
- What’s bad, different or weird about our business?
Asking these questions would help you gauge customers’ expectations and experiences, as well as what differentiates your business, Gallagher said. You could use online survey software such as SurveyMonkey to distribute questionnaires, he said.
Calculating your Net Promoter Score would also be useful in measuring customer experience, Gallagher said. To find your NPS, you would ask customers to use a zero to 10 scale to answer the question “How likely are you to recommend [brand] to a friend or colleague?” Customers’ answers would determine whether they are a promoter or detractor of your brand, or if they are passive. You would subtract the percentage of detractors from the percentage of promoters to find your NPS.
Once you’ve gathered sufficient customer data, you would be better equipped to reach new customers and start scaling, Gallagher said.
There’s no rule-of-thumb moment for when it’s the right time to begin the scaling process, Guzman said. Timing would depend on the nature of your company. However, fast-growing startups may have a better shot at successfully scaling than established businesses, he said.
“I don’t think there’s a right time to scale. In my experience, companies that start growing fast continue growing fast,” Guzman said. “Those who are stable can be set in their market.”
Next steps after scaling a business
After scaling your business, there will be more moving parts within the company that you’ll need to manage. You may decide to move into a new role or implement training tools to bring staff members up to speed, Gallagher said.
“We think about who needs to run the critical functions as the company grows and how that should be changing,” Gallagher said.
Be sure to keep an eye on accounting and financial reporting within the larger organization, Gallagher said. With more people involved in the business, there’s a higher risk of things going wrong, he said.
“You can get into trouble as you scale,” he said. “Things can get out of hand.”
As you add more people to your staff, establish metrics to measure their performance, Gallagher said. You’ll want to make sure everyone is doing their job correctly and efficiently to avoid wasting company resources.
It’s common for businesses to experience growing pains when scaling, Guzman said. You might feel a strain in your company culture, for instance. Employees who were around during the startup days may not like the structured environment of a bigger company. But you can’t run a large business without some of those corporate elements like a human resources department and workplace policies, Guzman said.
“It’s a matter of knowing what’s best for your company,” he said.
After scaling your business, it’s important to keep your expectations realistic, Guzman said. Some business owners are overly optimistic based on prior success, but it can take time to find your footing as a larger operation.
“Scaling is about replicating the value proposition in a larger size,” he said. “It’s not always easy.”
This article originally appeared on Lending Tree.