Almost all businesses come into existence as a start-up with only a handful of customers. Whilst there are many lifestyle businesses out there, happy to tread water and provide the owner with a certain quality of life, the majority will measure success in terms of their growth: both financial and operational. In this article we consider some of the factors that enable businesses to grow and to scale successfully.
Companies can adopt several strategies to increase their top line and profitability, and even a cursory review of successful businesses will demonstrate that there is no one set route that will work well for everyone. Most businesses can implement certain strategies for growth, but there is an important distinction between growing a business and scaling a business, and not all will be able to successfully implement the latter.
Growth versus scale
Broadly, growth is where revenue and costs increase broadly in step with each other – so selling more products or hiring more consultants to provide hourly services. Profit does grow with turnover under this model, but it can take a long time to do so. Scaling a business, conversely, is pushing a rapid increase in turnover with one hand, while controlling costs with the other, for instance by selling a software solution to more customers with minimal increase in the cost of providing the service. In this scenario, as both revenue and margin are increasing, the growth in profit is significantly accelerated.
Which strategy is the best fit depends on your ultimate goal for the business. For lifestyle businesses, a steady increase in profitability through the growth strategy allows a good balance between quality of life and a sustainable business. However, where the aim is to ultimately to exit the business, demonstrating a scalable business model is a key way to attract potential buyers, particularly in private equity.
Certain sectors are more amenable to a scalable business model. Generally, you need to have predictable, recurring revenues, a subscription-based model and high customer retention rates. Growth is driven by expenditure that is focussed on sales and marketing, not labour intensive, and not highly dependent on investment in plant and machinery.
Certain sectors are not an easy fit for scaling strategies – manufacturing jumps out as an obvious example. However, technology continues to disrupt traditional sectors, opening up opportunities to capitalise on artificial intelligence, big data and increased consumer willingness to engage with subscription models. 20 years ago, how many of us would have said the sale of DVDs would be ripe for scaling? But now the explosion of video-on-demand services shows how technology and innovation can influence evolving strategies.
Growth strategies are varied and should be bespoke to your business.
At a local level, reputation and word of mouth are powerful ways of attracting loyal customers, while companies with a wider geographic reach are likely to need to devote more resources to sales and marketing. However, it is important not to cast the net too wide, as targeted marketing activities are likely to be more productive in building a strong customer base. Expanding into new geographic regions is a well-trodden path for growth; the increase in remote working and e-commerce potentially makes that more straightforward than historically. Businesses can also look to grow through expanding existing product or service lines or vertical integration up or down the supply chain.
Organic growth can provide a steady increase in profit, and is easier to manage than the alternatives, but more rapid growth can be adopted through acquisition. Caution should be urged here; carefully targeted acquisitions can create real value for a business, but poorly thought through purchases can be highly disruptive to both businesses. It is always important to undertake an appropriate level of due diligence, and to have an objective in mind for any acquisition beyond growth for growths sake. For example, are you looking to expand your geographic reach, or add a new service line to your offering that customers will value?
A key theme here is a that a business needs to be clear on its desired destination before settling on the strategies it will adopt to get there. Clear communication is key; all employees and management need to be aware of the business’ values, objectives and strategy so that they can buy in and work towards those goals.
Building the foundations for growth
With any growth, but particularly when looking to scale, existing weaknesses in the business will be magnified as it expands. Gaps in the processes for servicing customer orders, which are often papered over by well-meaning employees when a company is small, can cause your reputation for customer service to drop rapidly as you grow. These weaknesses can crop up in many areas: debt collection, approval processes for purchases or stock management are common ones that become more apparent as a business grows.
It is always easier to get the fundamentals in place before you start to grow, allowing you to focus on expansion rather than continually firefighting.
A key part of this is appointing appropriate management, who can take on day-to-day matters as you move on to the ‘big picture’ expansion. If they are brought on board at an early stage, they will build loyalty with your organisation, and understand the processes of the business before they become too big to readily visualise. Clearly, appropriate incentive schemes are going to be integral to attracting this sort of long term buy-in to the business.
External support from professional advisors can boost your internal management team, particularly in areas where you do not have personal experience, and do not need to employ someone with that skillset on a day-to-day basis. Having trusted advisers you can turn to when appropriate can help to identify the optimal solution for a given issue and, again, free up your time to focus on the big picture.
The systems and controls need to be robust before expansion begins, ideally automating systems and reducing reliance on key individuals to ‘future-proof’ the business against a rapid increase in the volume of transactions. Investment in IT infrastructure and software is likely to be required, both on the operational and financial side, but also investment in the back-office teams that keep the business running smoothly – finance, IT and HR are all part of the systems. Both the people and the software need to be able to communicate easily, and there are a wide range of off the shelf products that will help you to do that, even if the teams are all working from their bedrooms.
Clearly, the above requires investment in terms of both of time and money. While some businesses may be able to extract sufficient cash from their working capital to fund growth, many will need to seek external funding.
Appropriate use of an overdraft or invoice discounting may enable a business to fund working capital, which is particularly useful when adopting organic growth. But a more long-term solution is often appropriate to achieve a step change in growth. Banks, alternative finance providers and private equity all have their place, and which is the most appropriate for a given business will depend on the requirements of the business and, crucially, the support required by the business founder to achieve their goals.
If you have any questions on the points raised here, please contact your usual Saffery Champness contact, or speak to Niraj Patel.