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THE idea of scale is something many owners of small firms and start-ups fail to get their heads around, yet it is a factor which needs to be considered before launching a business.
This column was inspired off the back of a comment made by JP Van der Spuy of , who said earlier this week that "scaling is a slow process without capital - I think the term 'bootstrapping' is just another word for fewer employees, more work and shoelace marketing".
What he says is very true: unless you have a plan on how you are going to scale your business up and manage that growth, you are going to be on the back foot from the word go.
Logically it makes sense to say that your business will be more successful the more customers it gets, but this is where it becomes tricky.
An important distinction that needs to made is that scaling your business does not mean adding to your cost base every time you want to grow; I think that is where many small business owners go wrong.
They say: "We must grow, therefore we need to hire more staff or expand." Unfortunately, this means more fixed costs which are there irrespective of whether you bring more revenue on board.
For example, my wife ran a medical practice a couple of years back where she was billing by the hour. If she wanted to grow her revenue she either had to work more hours or take on more therapists, which in turn raised the fixed cost bill.
It is difficult to scale something like that, so we turned the problem around and instead used the therapy practice to pay off property which we can hopefully accumulate as a nest egg down the line.
Beware the tech trap
Technology is the obvious answer to scale in many businesses - but it's only part of the solution and this needs to be remembered.
Too often entrepreneurs assume that the clever use of technology means they will be able to scale up quickly. Unfortunately, as the tech bubble showed with startling clarity, you can have the best tech in the world but if you don't have customers you are going to battle.
Before you take your plan to an investor, work out how you are going to scale the business up. If your revenue and profit growth depends purely on adding to your fixed costs line, you are likely to have a problem and leave yourself vulnerable if the growth doesn't materialise.
Coming back to JP's business, he has done very well to increase scale on one end of the offering. In three months he has grown the site to 36 000 product listings, which in anyone's language or business is not too shabby. On the tech front, he seems to have succeeded in using technology to provide a top quality and sizeable platform. Two pluses - now it's a case of growing the transactional revenue.
The subject of scaling has come up in two other discussions I have had this week, and I thought both raised important aspects that should be remembered by entrepreneurs and start-ups.
What the experts advise
The first was in my interview with Riaan Stassen, CEO of banking group Capitec. I put it to him that having amassed over 2 million clients in just over eight years, it was maybe time to start looking beyond South African borders. He disagreed with me completely, pointing out that people still mistook what Capitec was doing and considered it more of a microlender than a banking offering.
He said it would be able to continue growing by focusing on its banking business, ie not making a once-off loan but getting banking clients, depositors and people to use other Capitec products.
The second piece of advice came from Ferdie Bester who runs marketing consulting firm ClickMaven, which is also going through something of a growth spurt at the moment. He is very wary of raising the fixed costs of his business by adding staff.
To scale his business, he would rather pick the right clients and expand the product set he can cross-sell to them. This adds value to the client and means he can generate more revenue without taking on other fixed costs.
In conclusion, if you are one of those aspirant small business owners banging their heads against the desk of the credit officer at their friendly local bank or venture capitalist, it is maybe time to step back and re-evaluate. The people who are going to lend to you want to know that you have a clear idea of how your business will grow - preferably with as little risk as possible.
A very simple exercise is to take the cash-flow statement you have prepared; plot your income and expenses lines, and overlay the graphs.
If the two lines track one another or even narrow, chances are you have a problem and need to revisit how are you are going to scale the business up.
- Fin24.com
