When considering how to scale a small business, you may use strategies targeted to “growing” and “scaling” interchangeably – and it’s a common misconception. However, the two goals are a bit different, and understanding the differences can be key to your business’s long-term growth and success.
While every business needs some level of growth to survive and thrive, “scaling” can also be a windfall for some businesses – but it isn’t necessarily the direction that all businesses can or should go. Here, you’ll learn about whether you need to scale vs grow for your business, with tips on the best ways to scale yours.
What’s the difference between growing and scaling a business?
Often, “scaling” is a term that’s used for large businesses, especially those in tech fields, but it’s not limited to those alone. Scaling a business means its revenues increasingly outpace its costs. For small businesses:
- Growth typically means adding resources at the same rate as you add revenue. When your business expands, you hire more staff, rent more space, and buy more equipment to handle increased demand. As a result, your costs typically rise proportionally to your income.
- Scaling means increasing revenue without a proportional increase in costs. When you scale, you find ways to serve more customers or increase revenue using your existing products and services, as well as your resources. However, an initial investment may be needed for each scaling initiative.
It’s important to figure out the difference for your business because what counts as growth for one business may be more like scaling for another.
Is scaling right for your business?
While every small business must focus on growth, not every business should focus on scaling. Finding opportunities to scale within your business can be a great way to build your brand and generate increased revenue without significantly changing your day-to-day operations.
Here are the factors you’ll need to consider:
- Your goals: If your goal is simply to create a good living for yourself and your employees, you may not need to scale. Or, if you prefer hands-on involvement in daily operations, traditional growth may suit you better, because scaling often requires delegation and systematic approaches that can remove you from day-to-day tasks.
However, if you long for a consistent income without adding more staff or locations, finding a way to scale can be the right answer. And if you’re not sure which direction to go, referring back to your business plan can help you with significant decisions like these.
- Your business model: Service-based businesses often face more challenges when scaling than product-based businesses – but you can often scale by adding products.
- Your market demand: Before scaling, a sufficient demand for your products or services is essential.
- Your resources: Scaling requires investment in systems, products, technology, and processes, so you’ll need adequate cash flow and access to capital to implement scaling strategies effectively without straining your core operations.
When to scale your business
Several cues can identify if your business is ready for scaling. You should consider whether there’s:
- Consistent profitability: Your business should be consistently profitable for at least six months to a year. Also, if you have seasonal or other cycles, investment in scaling initiatives shouldn’t negatively impact those.
- Strong cash flow: Strained cash flow during scaling can severely impact your core business. Before taking on scaling initiatives, be sure you can sufficiently cover current and future expenses.
- Market validation: Customer feedback, sales data, and repeat business can demonstrate strong potential for additional demand for your products or services.
- Proven systems: You have documented processes that work reliably and can be increased without significant additional staffing.
- Capable team: You have reliable employees who can maintain quality standards for core operations – or access to a reputable and verified third-party vendor who can uphold your standards.
An example to identify if your business is ready
Let’s say you own a deli shop. The current location consistently has long lines and wait times, so there’s evidence of demand. The deli also has standardized recipes, efficient prep procedures, and reliable supplier relationships. Its steady profits could be invested in scaling initiatives without compromising day-to-day operations.
Here are some types of scaling strategies that could address demand and build revenue:
- Product-line extension: Although your deli is a service-based business at its core, there are ways that it can scale and build revenue with minimal impact on day-to-day operations. For example, you can increase revenue by creating signature soups, sauces, and salad dressings for retail sale in the deli and online. These could generate income with minimal additional labor, especially if a third-party private-label manufacturer and/or fulfillment company is secured.
- Catering services: If your team can use existing kitchen capacity during slower hours to prepare catering orders, then they can leverage current resources to build revenue – and although there would be additional costs for labor, ingredients, and other supplies, they would likely be outpaced by revenue growth. However, if you would need to significantly invest in expansion or secure a catering-kitchen location with your own team, then this would be more of a growth strategy than a scaling initiative.
- Technology integration: Implementing online ordering and payment systems could increase order volume without adding counter staff.
It’s important to know that for many small businesses, a mix of growth and scaling strategies hits the sweet spot for financial and other measures of success.
With the right approach, scaling can transform your small business into a thriving, efficient operation that serves more customers while maintaining the quality and the personal touch that helped you create your current level of success.
How to scale your business
Whether you’re running a deli or any other small business, the principles remain the same: understand your market, plan carefully, secure appropriate financing, and scale strategically. Start by assessing whether your business is ready for scaling, conduct thorough market research, and develop detailed financial projections.
1. Conduct market analysis
Before scaling, conduct thorough market research to understand:
- Competition: Assessing your business against your competitors should be an ongoing practice. When considering scaling initiatives, it’s essential to understand who else is serving your target market and whether your products or services will better meet existing needs.
- Customer demand and true potential: Before adopting scaling strategies, you need to analyze true market potential. Otherwise, you risk making a significant investment and getting stuck with stock.
- Trends: Consider whether there are emerging trends that you can leverage, including products and services, as well as ways to market them.
2. Update your financial projections and planning
To help you determine if scaling is right for you, create detailed financial projections with:
- Revenue forecasts: Estimate income from scaling activities based on market research and current performance data.
- Cost analysis: Calculate all expenses associated with scaling, including technology, equipment, additional inventory, and marketing.
- Break-even analysis: Determine how long it will take for scaling investments to pay for themselves.
- Cash flow projections: Ensure you maintain operations while implementing scaling strategies.
3. Analyze the operational impacts
When done well, scaling initiatives may have minimal impact on your core, day-to-day operations – but even so, there can be an impact on:
- Staffing: You may need different skills or additional training for existing staff.
- Inventory management: Ordering and carrying increased volume or new products may require better inventory systems and renewed supplier relationships.
- Quality control: Maintaining quality can be more challenging as volume increases or production is outsourced, such as when recipes have to be revised to meet shelf-life standards.
- Customer service: More customers mean more service touchpoints to manage.
4. Create a sales and marketing strategy
Before undertaking scaling initiatives, create basic but thoughtful and realistic sales and marketing plans that address:
- Customer acquisition, including how you’ll reach new customers.
- Retention strategies to keep existing customers engaged.
- Brand consistency across all resources and touchpoints – if you don’t currently have a marketing or brand manager, you may need to hire a team member or freelancer.
- Pricing strategy, since scaling can affect your pricing model.
5. Finance your scaling efforts
Growth and scaling initiatives are important considerations as you plan to launch a new business – and they become critical as your business becomes more established. Several financing options can support your scaling plans:
- Small business loans: Although traditional bank loans may be available to established businesses, Small Business Administration (SBA) loans and other alternative options offer competitive rates with more flexible approval criteria, making it easier for small businesses to get the financing they need.
- Equipment financing: These are loans specifically offered by equipment manufacturers and distributors. They can help you get the equipment needed for scaling.
- Business lines of credit: Business lines of credit can offer flexible financing for ongoing operational needs during scaling.
- Investor funding: For some small businesses, bringing in investors who provide capital in exchange for equity can be a path to successful scaling.
Here’s something to keep in mind: Successful scaling doesn’t just make your business bigger – done well, it makes you smarter about your business. By focusing on efficiency and leveraging your existing resources, you can increase revenue while controlling costs, setting your business up for long-term success.
Taking the next step: Pursuit can help
Now that you have a basic understanding of how to scale a small business, you can better determine the strategy that best suits your goals – both for your business and for your own version of success.
And, if you need financing to achieve your scaling and growth goals, Pursuit can help!
We’re a leading small business lender serving businesses of all shapes and sizes. We offer loans and a line of credit from $10,000 to $5 million for working capital, commercial real estate, equipment, and more. You can use these funds to grow or scale, and for just about any small business need.
Contact us today to learn more.