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Build And Grow

Four warning signs your business won't scale

Nikki Roser

By Nikki Roser

Nikki Roser is the President & CEO of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. She is a CPA, holds an MBA, is passionate about building relationships with entrepreneurs and business owners, and leverages her experience to share financial and strategic advice. Partnering with clients and watching their business thrive and prosper is her greatest joy.

Growing your business is one thing – but building it to scale is another.

Scaling a business is all about creating operational leverage, which is a fancy way of trying to do more with less. Scaling allows a business to handle increased capacity (hopefully in response to user demand) and create fresh profits without adding heavy and costly infrastructure.

It’s the reason we are seeing so many dot-com businesses entering the marketplace. For relatively little risk, there is a potentially huge reward.

In the manufacturing era, scaling a business involved adding production lines, people and equipment to increase output. It was all about improvements to physical output – and that cost money. In today’s digital marketplace, where the cost to serve each incremental customer is nominal because the raw material is often bits and bytes, scalability can be achieved for a very nominal cost.

A digital company gives the entrepreneur the opportunity to serve a lot of customers with every little input (when compared with other business models). And that’s why we are seeing an explosion of high-tech and dot-com companies all hoping to be the next Facebook.

Evolving the business in this way requires careful planning and preparation to make sure appropriate resources and systems are in place at each stage of growth. Like a car speeding down the road, the entrepreneur must prepare for the next turn long before the business reaches it.

Make sure your business is equipped with these elements necessary to achieve scale.

You have horizon money

Growth businesses typically seek financing in “rounds”. First round (or “seed”) financing gets the business off the ground during its launch period (about 12 months) during which time the business has established a working prototype, written a business plan and secured a few first customers. First round financing usually comes in the form of smaller amounts, likely less than $10,000, and may come from friends and family.

Second round financing may involve “angel investors” who are other business people willing to inject some larger dollars into the business. The new business has a working product to ‘demo’, and some early sales to help prove that people will actually pay for it. Angel Investors may invest $200,000 or more – enough money to let the business survive the next year or so.

Meanwhile, the search for additional funding heats up. Third round financing typically involves millions of dollars of venture capital, which is money from professional investment firms or funds seeking a healthy return within five years or less, often realized by the sale of the business or an Initial Public Offering (IPO) listing on a stock exchange.

Raising money takes time. Immediately after securing each stage of funding, the management team should be on the hunt for the next round of financing. If they’re not out wooing investors and lenders well in advance of actually needed the cash, it’s a sign the business won’t reach its next growth stage.

Clear vision

Being big requires thinking big.

Getting your business to scale will require vision, leadership, teamwork and a certain amount of bravado. People associated with the business want to know what the plan is to take the company to new heights. Business leaders must assess opportunities to work with other companies, enter new markets, recruit top talent, and think beyond the balance sheet to cultivate their unique vision and ambition.

The ability to clearly articulate what the company does and where it will go is essential to rally support of investors, customers, vendors and employees.

Experienced management team

You can achieve scale by playing to your strengths and delegating your weaknesses. In other words, acknowledge what you do best and where you’ll need help.

You and your high-school buddy may be the company co-founders, and you did an admirable job of guiding the new business through the start-up phase, but you may lack the skills, experience or education required to scale the business.

Addressing these types of personal shortcomings will make it easier to find people with the talents you need to scale up.

A business earning $100,000 is quite different from one earning $100 million. Running a large company involves more complex rules, more cutthroat competitors and much higher stakes.

Getting to that size will require an infusion of management talent with advanced skills in such as areas as opening international operations, developing products, supervising complex technology-based systems and raising venture capital.

A willingness to bring in more experienced management is a sure sign the business will scale.

Doesn’t require specialized labor

There’s a reason why McDonald’s restaurants succeed anywhere in the world: anyone can work there. McDonald’s doesn’t require electrical engineers to work the fryer. They don’t hire PhDs to wrap the burgers. Their systems are so easy to follow that a franchisee can hire inexpensive and inexperienced workers. Affordability of their labor input has partially allowed the company to scale to its impressive size.

Designing your business to operate with unskilled labor (or little labor at all) is a sign it can achieve scale.

Technology, for example, requires little labor input to achieve fantastic output. An app for a mobile phone only needs to be programmed once, distributed and marketed. Unlike analog business models, additional labor isn’t required to run the app as it grows in popularity – even if a million people use it.

A business that is not labor-intensive or requires expensive and skilled people is primed for scale because input costs won’t rise in line with the number of customers.

Expect some risk

Scaling is risky, hard work. There are plenty of moving parts to manage and the dollars at play may be large.

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