The Challenge of Scaling
Starting a business is not always easy. But scaling a business, any business, often brings many more challenges than actually starting one. A typical small business is quite simple, bat as that business grows it becomes more complex and has more moving parts which become ever more complicated to coordinate.
What works for a micro or start-up business will not continue to work as the same business grows. According to UK government statistics, in recent years some 660,000 new companies are established each year and many of these will have plans to scale rather than to remain a micro business. It is also sad to say that a reasonable percentage will fail, and many of those within the first three years.
But what are the main issues and challenges that a scaling business will have to face, and indeed to find solutions to? The first is time. As any founder will know, there is always so much to do and so little time, but as a business scales there is more and more to do and, seemingly, less and less time to do it. One good way of combatting this is to ensure that adequate systems and procedures are put in place in time and they themselves are scaled appropriately to cope with any growth the company might experience. For many businesses, however, putting the systems in place takes time and so this is constantly put off and that just makes the eventual implementation more complicated.
Cash flow is key for any business of any size and even more important for a smaller business as it does not have the same reserves that a larger or longer established business will typically have. But a scaling business consumes cash even more as cash must be invested in new assets or stock before this can be turned into increased sales and profits. Most growing businesses scale over a period and so the pressure on cash remains fairly constant. This can be mitigated by seeking payment terms that are as long as possible whilst encouraging debtors to pay invoices and any other amounts owing as soon as possible.
Managing cash and cash flows can take some time to get right, but it is so core to the very existence of a business that it is well worth making the effort to ensure that it is maximised. This includes stock control, closely monitoring costs and sales, building up something of a cash reserve to act as a buffer in need, and ensuring that your margins are as high as possible without impacting on sales.
The majority of businesses looking to scale will come to the conclusion that it is necessary to obtain external finance, and this will normally be in the form of equity investment. Whilst this may be a very necessary step, perhaps the biggest mistake that I come across is founders expecting fundraising to be quicker and easier than it often is. It will typically take six months and will take more hours every week than most would imagine. A fund-raising round should ensure that you have a runway of between 12 to 18 months as whilst raising finance the founders are not fully focussed on running and growing the business. Getting the timing, size, valuation, and every other aspect of the raise right will often determine its outcome.
Scaling also brings challenges such as having to find and take on more staff, premises often need to be expanded in some way, and as the business grows it will become more complex requiring more assistance from accountants, lawyers, and other professionals.
Advisory Boards can help with all the above challenges as they are made up of more experienced individuals that have often ‘been there, done that’ but the right advisors should also be filling the gaps in knowledge and contacts that the founders do not have. Remember also that investors normally want to see an Advisory Board in place as they help to guide the business and keep it on the right track and thereby improve that chances that the business will succeed.
Whilst scaling certainly brings additional challenges than just maintaining a smaller business, all of those challenges are can be overcome and, if done with care, scaling can put the business on a much firmer footing for the future as well as a much larger one.
This series of articles follows themes explored in more detail in my new book, Startup to Scale-up : what funders expect at each stage Go to the link to order your copy and use the discount code 10off-start-to-scale to get a 10% discount.