The good news is you want to scale your business. The bad news is that a lot of businesses have tried to scale and haven’t succeeded. In fact, some have gone out of business exactly because they tried to scale.
So how can you avoid that? What are the major breakdowns that tend to frequently cause business owners and entrepreneurs to get stuck in their scaling efforts—and how can you avoid making those same mistakes yourself?
If you find either of those questions interesting, then you’ll want to keep reading this week’s post on how to avoid the major breakdowns that frequently occur whenever a business owner/entrepreneur attempts to scale their business.
I. Fall In Love with Cash
Back in the early 1980’s (a very long time ago) I was an accounting major at the University of Wisconsin-Madison. And it was probably my first day in accounting 101 when the professor said, “In business, cash is king.” I’ve never forgotten that. You can manipulate data to tell all kinds of stories in financial reports but there’s one report that matters more than any other in scaling—your cash flow report. Nothing else comes close.
If there’s one universal truth about scaling it’s this
“Growth sucks cash!”
So, if you want to scale your business, you have to constantly be forecasting and managing cash. If you have cash today, awesome. But if you have $200K in cash today and think, “Now’s the time to scale up” so you start adding people and technology that cause you to bleed $80K/month, you have a potential problem in a few months if sales lag at all.
This same scenario happens if you bill in arrears. If Joe works on account A today, at the beginning of the month, and you bill him out at $200/hour, you pay him for those hours on either the 15th or 30th of that month. However, if you bill your clients at the end of the month (i.e. the first week of the next month) and then bill on net 30, you won’t receive money until somewhere 30-45 days after you paid Joe for that labor (and that’s if the company pays you within 30 days, which, for some companies, is a huge assumption).
For one person, that might not seem like a major problem, but when you’re scaling, that happens with everyone whose time is billed. In essence, you become a bank for your clients. The $8,000 you paid Joe, 45 days before you got paid (with no interest or fee for being a bank) is now multiplied by the number of billable people you have (let’s say, 15), which means you’re now carrying a $120,000 cash flow loss for those 30-45 days. Ugh!
In other words, if you want to scale, you have to fall in love with cash and cash flow management. Far too many businesses that have tried to scale have gotten into trouble because they got too far out over their skis—they weren’t paying attention to cash flow. What might look good today could look terrible in three to six months.
II. Staff Ahead of Demand
This might seem counterintuitive based on point one, but if you’re managing cash well, it shouldn’t be. One of the more common problems in most small businesses is that they usually wait until they absolutely need to hire someone and then wait some more.
What makes this so problematic is that very few businesses can go out and hire an A-player staff member this week. Just think back on your hiring experience. Between the time you decided you needed to hire someone and the time you actually did and they were on your payroll, what was the average length of time between those events? Rarely does that happen within 30 days. More often, it takes three to six months (note: the qualification was A-player staff member, not warm body).
Using whatever number of weeks/months your average is, you can see why this would be a problem with scaling. If you wait until demand is needed and it takes you, let’s say, three months on average to find an A-player staff member, what happens to your growth? Exactly, it plateaus.
However, if you know it takes three months, on average, to find an A-player staff member, and you’re monitoring your growth well, three to four months BEFORE demand requires it, you should begin your hiring process. This way, you’ll have no constraint on your growth. You’ll simply keep growing because you increased your company capacity before capacity could be reached.
So, how far before demand do you need to start your searches?
Note: you can short-circuit some of this be constantly working on your virtual bench ahead of time.
III. Systematize Your Hiring and Onboarding Processes
Following on the heels of point two is another common problem that happens to most business owners and entrepreneurs when it comes to scaling—hiring poorly. Note: most business owners and entrepreneurs don’t like to own this principle because of selective memory. They remember the good hires and forget most of the bad ones. But, on average, most business leaders are successful at hiring A-players somewhere in the 15-30% range (in school, we call that an F).
If you want to figure out your ratio, list all of the people you’ve ever hired over the years, then put a letter grade next to them (A, B, C, D or F). Add up all of the A’s and divide that by the total number of hires you’ve made. Chances are the percentage isn’t as high as you originally imagined.
There are a number of reasons for this but right at the top of that list is that most business owners and entrepreneurs have no process for hiring, let alone onboarding new hires. Typically, it’s a very loose, seat-of-the-pants process driven by the desire to get this done as soon as possible—and then we wonder why so few hires are good hires.
This becomes exponentially worse whenever you’re trying to scale because you have to hire faster than normal and you need to have highly capable people who can quickly make a contribution to the team or you’ll stall out your scaling efforts.
The better option is to create a step-by-step process for hiring. In BizScalers, we use a 12 step process. You can refine that down to fewer if you’d like, but you need to create a step-by-step process for hiring that you use EVERY SINGLE TIME to ensure you have the best chance at hiring great talent—and then you need a step-by-step onboarding process to ensure they get up to speed quickly and fall in love with your company.
So, what is your process for hiring and onboarding? And is each step in your processes documented and used every single time?
If you want to scale, you need to nail this one down.
BTW, the national average that I’ve seen is that one out of every three hires is gone within six months. That’s a major problem when scaling.
IV. Refuse to Be the Bottleneck
Technically, this isn’t possible but the principle is valid. Let me explain. In every business, the business owner/entrepreneur is both the primary reason for that business’ growth as well as its primary bottleneck. This is true, no matter how large your businesses is—whether you’re doing $500K this year or $5M or $50M or $500M or $5B. Whatever the current limitation is of your company, you’re the bottleneck (hence why I said, technically this isn’t possible).
However, you can become a bottleneck at a higher level. That’s why, if you want to scale, you want to refuse to be the bottleneck at your current level. If you’ve led your business to be a $2M per year business, that’s awesome. Very few companies make it to $2M. However, the reason you’re not a $5M/year business is probably because you’re not leading at the level that a $5M/year CEO would. The solution is,
“Grow the leader, grow the business”
To keep this short, there are two things that are absolutely critical if you want to avoid being the bottleneck. One, you need to commit to learning how to lead at a higher level. That’s why I run The BizScalers Club. It’s an educational platform designed to help you learn how to design and build a more scalable business. However, you don’t have to be a member to grow. There are lots of options for how to do this. The key is that you commit to growing you. And my simple rule for this is commit to scheduling at least one hour PER DAY to learning at least 5-7 days per week.
The second key to refusing to be the bottleneck when you’re scaling is to become a delegation master, not a dumper. Most business owners and entrepreneurs are delegation dumpers, “Sally, take care of this,” as if just giving someone a task is enough.
To help you master this, here’s the link to a free download (no opt-in required) and video training on The Business Owner’s Perfect Delegation Checklist.
If you want to scale, you have to grow yourself first and then delegate like a boss.
V. Change Before Your Have To
Years ago I was told that Peter Drucker said that organizations have to change their structure for every 45% growth. Whether he said that or not, the basic idea holds that as organizations grow, the organization itself needs to continually adapt to the new reality. When you were a company of five and “everyone knew everything” that worked at that point. However, at 15 employees, that doesn’t work very well. And at 50, forget it.
Back in the early days of my pastoral career when our church was averaging around 120 people per week, I learned that the 200 barrier (referring to weekly attendance) was the pastor barrier (similar to the business owner barrier) where the ministry had to change from one person making all the decisions to a staff and leader decision-making and ministry. I also learned that the 400 barrier was the board barrier where the board members, who in the early days are basically unpaid staff, needed to give up those responsibilities and trust that staff members should be doing that work and they should move to more of a policy-making and oversight board. Note: both of these changes are hard to make (i.e. senior pastors and boards giving up control is not easy to accomplish), which is why most churches don’t break the 200 and 400 barriers.
However, because I knew these were the barriers we were heading into, when we were averaging between 150–180 people per week, I made both of those changes at the same time. They were far from easy (especially board members giving up control) but the result was that we soared through both of those barriers when others got stuck (and some are still stuck there 25 years later).
In your business, if you want to scale, you should constantly be thinking about how you and your business need to change before you have to
- What products or services do we need to add or delete to our mix before we have to?
- What do we need to improve or innovate to stay ahead of our competitors?
- How do we need to adjust our org chart and hires before we run into a problem?
- What technology do we need to change out or acquire before we’re required to?
- Do we have some people on our team who were effective in the past whom we no longer can justify on the payroll?
- Do we need to increase the quality of our staff team before we hit some capacity problems?
- Do we need to upgrade to a new platform to handle the increased demand of our customers? Etc.
Scale efforts stall when someone at the top isn’t forcing the organization to constantly change before change is required. So, if you want to avoid that, make sure you’re constantly changing your organization, your strategies, your tactics, your people, your organizational design, your technology, etc. before you have to.
So, there you have it—five keys for how you can avoid some of the major breakdowns that frequently occur whenever a business attempts to scale.
- Fall in love with cash
- Staff ahead of demand
- Systematize your hiring and onboarding process
- Refuse to be the bottleneck
- Change before you have to
If you do each of those five things, you’ll avoid some of the most common breakdowns any business owner/entrepreneur encounters whenever they attempt to scale their business.
To your accelerated success!
P.S. Don’t forget to share this lesson with some of your friends and peers on your favorite social network.