Can your business scale?

“Scaling a business is never easy. At the end of the day it comes down to understanding where a business is, where it needs to be and how it can get there. One of the key elements of success is having a deep knowledge of the financial status of a business. If you aren’t already plugged into the monetary health of your business, you can’t scale,” –  Chris Charlton, Charltons Accountants. 

Guest blog: Chris Charlton, Charltons Accountants

For many businesses, scaling can be daunting but it can also be a hugely important process if you want your business to achieve longevity and long-term success. At its simplest, scaling a business means turning your products or services into something that can be offered to multiple customers, without serious limitations.

The most important question you have to ask is whether your business can sell more, while not acquiring expenses at the same rate and to the same extent. For example, most start-ups like Facebook can add new users without spending a great deal. And they know that their cost per acquisition is always going to be lower than the amount of advertising revenue they can generate from that user.

Here’s the basic mechanic for scaling a business:

For every increase in revenue, there must be a significant & exponentially lower increase in acquisition and support costs.

This is going to apply no matter what industry you are in or what product or service you are selling. There’s really no other way to scale a business other than with this mechanic. It’s the bare-bones but it’s absolutely accurate.

Can you increase your revenue?

If you want to scale, you need to have a business that can increase revenue. That may seem obvious, but consider this: you need a product or service that has a large market open to it, that can change to fit existing markets, or can reach an emerging market. You can’t have a product or service that is limited in scope or location. Without room to sell to more people, you can’t increase revenue and will never be able to scale.

Understanding your current numbers around sales, income, cash-flow and projected growth is crucial if you want to increase revenue. This knowledge can only come from deep analysis and investigation but once you have the data, it will be easy to see where your business can go. You may even discover that there are certain areas or products that have scalable potential where other areas don’t!

Do you understand your cost per acquisition?

The second part of the mechanic is a lot harder because you need to understand how much money it costs to acquire and retain customers. This includes marketing, administrative or advertising costs – whatever you’re spending money on to get people through the door (metaphorically speaking!).

That cost per acquisition is what you need to beat – and you need to beat it every single time you scale or grow and every single time you add users or customers. If you can’t beat that number, you won’t be able to sustain your company because the revenue will not be enough to continually cover the cost of new business.

Can you manage your support costs?

You need to grow revenue without losing track or control of your support costs. This includes out costs for office space, manufacturing, staff’s salaries, insurance and anything else that could possibly grow if you sell more.

It’s easy to fall into the trap of spending just as much money as you make, no matter how much you make. Businesses do this all the time – by not focusing on low cost per acquisition or by maintaining a high burn rate a business can spend its cash reserves and revenue faster and harder than they can build them up.

Again, a deep analysis of your financial data is key. You’ll need to itemise and understand everything you are spending money on and ensure when you increase the number of customers or clients that you are servicing, those costs aren’t going to increase. There’s going to have to be some cost cutting. You’ll need to be able to highlight what outgoings are not justifiable compared to the income that these elements can generate or support.

This is the second edition of Spotcap Specialists –  a content series which features advice and tips from experts in a range of fields to support small business growth.

This post was written by Chris Charlton, Managing Director, of Charltons. Chris is a Chartered Accountant and Certified Tax Advisor and has been Charltons’ visionary and leader for over 35 years. A hands-on approach to clients’ tax affairs to ascertain and negotiate the best tax outcomes was the driving force in establishing a reputation for problem solving and proactive counsel.