Two terms that are often confused in the business world are growth and scaling. While both terms refer to an increase in a business’ profits or revenues, there is a big difference between the two. When companies talk about growth, they are often talking about increasing revenue and increasing their resources or costs at the same or a very similar pace. For example, a growing company might add new employees to create or service its products at the same time it adds new customers.
When a company scales, it increases revenue, often at an exponential rate. But, the increase in resources required occurs at an incremental rate, if at all. A company that is scaling effectively is able to bring in $20 million worth of revenue for the same cost or nearly the same cost as it brought in $10 million.
Where the difference between growth and scaling becomes most apparent is when a company is no longer a start up or small business, but not quite a large, multi-national company. According to Ron Carucci at the Harvard Business Review, mid-sized companies in the US have $3.8 trillion private sector GDP, making them the fourth largest global economy in the world. Because mid-sized companies don’t have the cache of startups or the clout of major multi-nationals, and because they tend to be more stable than start ups, they don’t get the same amount of press or attention.
But, a medium sized company needs just as much guidance when it comes to financial issues as a start up or big business. Since this is the point at which a company should ideally start focusing on scaling over growth, it’s also the point when a business is most likely to be helped by the services of a virtual chief financial officer. There are several tactics a mid-size business can take to help it scale and increase its revenues and profits.
Step one to limiting the amount spent on resources is focusing on creating standards for your company’s operations. While it’s not uncommon for start ups to have an aversion to standardization, there’s not a large business in the world that would be where it is today without standards. Think of multi-chain fast food restaurants. If one Wendy’s served medium-sized Frosty’s in a cup that was larger than the medium Frosty at a neighboring Wendy’s, there will be chaos and confusion. People would be unsure of what they were getting when they ordered a medium, and the costs of the same order would be higher at the one location than at the other.
The second step when scaling a business is using processes that are automatic or finding ways to automate processes. For example, if your company needs to hire a new person to produce your product or a new salesperson every time it wants to reach new customers, your costs will continue to grow at the same rate as your revenue. But if the process of selling or producing your product is automated, you’re able to reach new customers and increase revenue at a much greater rate.
Technology companies are often good examples of companies that can easily automate processes and scale. Once you’ve created an app and people begin to buy it, you don’t need to spend more to produce additional copies of your app. It can be duplicated and sold over and over again, without cost your company.
Scaling and growing don’t have to be mutually exclusive. At some point in your company’s journey, you might need to increase your resources at the same pace as your revenue. For example, demand might become so great that you decide to launch a new product, and need to invest the resources to develop and promote that new product.
The team at New Direction Capital is happy to work with you and put together a plan for profitable growth and to help you determine where to focus on your energy, whether on scaling your company or increasing revenue and costs at a comparable rate. Contact us today to learn more.
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