Although it’s your company’s profit margin that determines how much money eventually ends up in your pocket – and not the volume of your sales - there’s an inextricable link between revenues and profits, and an effective scaling strategy should address both.
When the time comes to grow your business from one level to the next, the following outline can serve as an effective starting point for fleshing out your scaling strategy:
- Set profitability goals that are based on a framework of well-calculated risk
- Create a detailed plan for accomplishing each goal
- Implement and follow up on your strategy by measuring its results
In terms of the actual goals you choose to set for your business, you’ll want to consider such big-picture dynamics as:
- Improving your cash flow,
- Promoting market expansion,
- Generating and converting new leads,
- Increasing the size and frequency of your sales transactions
Let’s take a brief look at what defines each of these scaling objectives, and how you can be sure that the results they’re producing are profitable.
Harnessing Your Cash Flow
Cash flow is the total amount of money that’s moving in and out of your business. The more positive and stable your cash flow is – meaning the more money that’s flowing in on a regular basis - the better equipped you’ll be to take advantage of profit generating activities like investing in new products or services.
Exploring New Markets
The key to mitigating risk in attempting to break into new markets is to manage expansion carefully with the help of thorough and appropriate research. You should also consider the potential of leveraging your current products or services to tap into brand new revenue streams at minimal cost.
Creating and Converting Quality Leads
The formula is simple: more clients = more sales = more profits, but developing a larger customer base is sometimes easier said than done. Not only do you have to find potential new customers, you also have to turn them into buyers. To keep lead generation and conversion cost-effective, it’s important that you advertise and promote wisely. A high quality web presence, efficient networking, and referrals from positive customer reviews are some of the most effective and low-cost ways to attract and keep new clients.
Upgrading Your Sales Transactions
Up-selling, cross-selling, and product or service diversification are all great ways to get the most out of every customer transaction. The trick, of course, is to encourage new and regular customers alike to spend as much money as possible each time they use your services, without coming across as brash, annoying, or over-the-top “salesy”.
Keeping Tabs on Your Efforts
Once your scaling strategy is underway, it’s important that you consistently analyze, tweak, and improve upon it in response to what the numbers are telling you. The services of a qualified business accountant may be helpful in interpreting your financial results, but if you’re going it alone, some of the areas you should consider scrutinizing on a regular basis include:
- your gross profit margin,
- your overhead ratio, and
- your asset turnover
These terms sound complicated, but they’re actually simple measurements of profitability based on well-established financial ratios. Revenue amounts, cost of goods sold (COGS), and your total assets are all numbers that can be obtained from your professional outsourced bookkeeper.
By plugging these figures into some basic mathematical formulas, you can evaluate and compare your company’s performance over a given period of time to see how your scaling efforts are faring.
- Gross Profit Margin
When you subtract all the costs associated with creating your product or selling your service (COGS) from your company’s revenues, you’ll arrive at your gross profit. If you take that figure and divide it by your total revenue, it will give you your gross profit margin.
- Overhead Ratio
This ratio lets you measure your company’s overhead expenses as a percentage of the income your business is generating. The less it costs for your company to successfully do what it does, the more efficient, and profitable, your operations will be.
- Asset Turnover
Dividing your company’s revenues by the value of its total assets (basically everything your business owns that can be converted into cash) will let you know how hard those assets are working to generate income for you. This is another measure of your business’s overall profitability.
In the end, it’s important to remember that the healthy expansion of your small business is ultimately about scaling at a rate that matches exponential revenue growth, with cost increases that are both appropriate and incremental.