Scaling operations is a buzz word in today’s business world. Everyone we talk to has plans to grow and scale their business. Most executives and management teams don’t understand the hidden costs behind their planned business growth. It’s not as simple as increasing revenues will result in a better bottom line. In fact, it’s not uncommon to see losses during times of intense growth. Let’s talk about why this happens.
Let’s look at your costs. Which ones drive revenue?
Labor is typically one of the largest expenses for a business. What is the capacity of our current employees? If we have capacity, how much more work can our current staff handle? Or is our current staff barely able to get orders out the door, there’s no way they can handle more orders? Is there room to innovate, streamline, and automate processes in order to free up capacity with our current employees? If you need to hire more employees to cover your increase in workload, don’t forget to also increase your payroll tax expense, employee benefit expenses, and retirement contribution expenses.
Inventory is important to evaluate because this is where a large amount of cash is typically tied up. When we decide to scale a company, we need to ramp up our manufacturing and product line. This means investing in inventory. I say “investing” because typically businesses have to purchase inventory and raw material before they can manufacture and sell their products. This initial outlay of cash can be a burden on the company’s cash flow.
After we start selling our product, our inventory costs pass from the balance sheet to our Cost of Goods Sold on the Income Statement. It’s important to review our pricing strategies and keep track of our sales margins and gross profit margins to ensure we are selling our products at a large enough margin to cover our costs and generate profits.
What is our current equipment utilization rate? Can our equipment handle our dreams of scaling? Do we need to purchase or lease more equipment to handle our growth plans? Do we have enough cash on hand to purchase the new equipment needed for scaling our operations?
What if you operate a software company? Do you have enough bandwidth on your servers to handle your growth plans? Do you need to add additional servers?
What about service based businesses? Don’t think you’re off the hook. How do you provide your services? Do you need to purchase additional treatment tables, work stations, vehicles, software, tools, hire more staff, etc. to meet the increased customer demands?
Office and Warehouse Space
Does our current location have the space to support our growth goals? Are we expanding at the seams or does our current space offer room to grow? Intense growth typically requires businesses to look at renting or buying larger spaces to house their new employees, new equipment, increased manufacturing operations, a place to store our additional inventory, provide additional parking for our increased fleet of vehicles, etc.
We need to have a plan to sell the services and products that are resulting form scaling our operations. It’s not always as simple as “if we build it, they will come.” Do we need to hire additional sales staff to help find new customers and sell to our current customers? What about marketing? How are we going to tell the world about our new and improved products? Marketing and advertising costs typically increase during times of business growth. Beware, these are costs that are typically incurred before we start generating sales. Another cash flow hit, before we can reap the benefits of scaling our operations.
Research and Development
Does our growth plans involve developing and creating new products? R&D can be expensive on the front end with no guarantees of rewards on the back end. Do we have the capital needed to support our R&D operations and goals? Talk to you accountant about R&D tax credits and R&D payroll tax credits that could be very beneficial to your tax savings strategies.
What about admin costs of adding new employees? Our new employees are going to need computers, desks and/or workstations, tools, software, email addresses, business cards, cell phones, etc. These “little” costs can not be forgotten about as they can become substantial depending on the level of growth we are planning.
Can our basic bookkeeping staff keep up with the extra invoicing and billing? Do they have the skills to help us manage our cash? What about the ability to create financial models to help us track and measure our growth progress? It might be time to bring on advanced bookkeepers, a controller, or fractional CFO’s to help manage your company’s finances.
As you can see, there’s a lot to think about when deciding if scaling operations is the right move for your company. Scaling effectively takes a lot of planning and requires significant cash. There’s a lot more that happens behind the scenes on your financial statements when your management team decides to simply sell more products. With the proper plans in place, scaling operations can be a great move for your small and mid-sized business.