An Entrepreneurs Dilemma- When to scale up your business?
Over the years of our working with entrepreneurs, we have noticed that while there is generally a robust understanding about the start up process and funding requirements, things seem to taper down when it comes to scaling up of the business. While a valid argument is that entrepreneurs seldom get time to think about the “next-step”, in essence it is essential to plan for expansion early in the business life cycle. A robust business plan where key milestones and triggers are well defined goes a long way in supporting this process.
Typically, most start up enterprises goes through a series of crests and troughs, or simply put the good times and the not so good ones. It is by leveraging the former that a business owner can successfully survive through the latter. Theoretically this sounds brilliant, but from a business perspective what are the key “triggers of realization” that signify a need to expand and move to the next level.
Demand comes in phases leading to capacity bottlenecks – This is a something that most start up businesses face. The best case scenario is having a large or a couple of large corporates buying your products or services, which gives stability and a basic critical mass to the business. Unfortunately, that does not always happen and retail buying remains the basic market segment.
When demand peaks, often there is a capacity crunch to deliver, or the technology infrastructure is not up to speed. The marketing initiatives slow down to adjust for capacity and instead of pushing for more growth the business stagnates and fails to leverage new opportunities. Take a punt and recruit or increase infrastructure capacity. There will be periods when the business slows down leading to low capacity utilization, but remember the next big wave is just around the corner. A good couple of months can pay for an extended bad run.
You pay your bills and have a little left over – This is a great place to be in. While having a good income statement is important, do not forget your cash flows. Businesses would ideally prefer to have money in the bank before expanding. Make no mistake, it is absolutely critical to have a “war chest” in place. However, do not wait for a large pay out day, rather create your expansion plan with small milestones in mind. Keep working on the things that need to be done in a phased manner.
A phased approach especially for comparatively small businesses is essential from a risk perspective. With limited resources, optimizing both fiscal and non fiscal investments is critical. Also, should you need to pull out at some stage, the investment dilution will be lower, when compared to a big bang approach. Again, a phased rollout may not work for certain industries which need larger capital investments. Remember if your business has been doing well at a certain operational scale and your expansion plan is well defined, you stand a good chance of succeeding, hence go for it.
A great team willing to go that extra yard for the business – Having a good team with skills that are complimentary and allows you to take a more strategic role, without having to spend a lot of time on the day to day operational activities, is a good sign that your business model has matured. While this may not necessarily signify robust cash flows, it sure gives you as an entrepreneur, the opportunity to strategize for the next big step, be it within the same business or for a new venture.
Now this might sound diabolical i.e. thinking of a new venture while discussing expansion strategies, why not let your current business remain the “cash cow” of your portfolio for a while, while a “star” in the making need your attention.
Get a comprehensive business plan for the new venture, or if required one that combines both the businesses to generate efficiencies, but ensure that you do not neglect your current cash flows. The best way to prosper is through growth and expansion, keep looking for the “triggers of realization”.