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Scale in business has nothing to do with fish scales or measuring devices. Scale means the ease & ability to grow. As in, economies of scale. For example, a mutual fund money manager has tremendous economies of scales. It is very easy to grow. If assets under management double then revenues will also double without any need for additional infrastructure (people, office space, computers…).
The firm the money manager uses to answer their phones cannot scale as easily. If assets under management double it means that twice as many people are now investing in the fund. This means twice as many phone calls. If each phone answering person can only handle so many calls an hour, the only way to grow is to add more people, more phones, more phone lines, desks, etc.
The law and accounting firms the money manager uses cannot scale well at all. The only way they can double revenues is to double their number of hours billed. There are only so many hours in a day so unless lawyers can clone themselves, they need to hire more qualified and experienced people. It is not as easy to staff a lawyer or accountant as it is someone answering a phone. Lawyers and accountants have years of education and have passed tests that admit them to practice. You cannot just pick someone off the street and say “Want to be a CPA today?” Growing a professional practice means either stealing someone from another firm or waiting until the next class of lawyers or accountants graduates, which takes time. If a firm needs time to grow because of skill shortages or to move into a larger building, it cannot scale well.
What does this have to do with thinking backwards or MBO?
A lot, if you have a business that can scale well (money manager, writer, software or any business that can outsource most of its functions) you do not have to plan for future growth except about how to get it. On the other hand, if you have a business that does not scale well (steel foundries, construction, dentists & other professional practices) then you need to think and plan backwards.
In other words, you need to imagine what infrastructure you will need to support the future sales you want. If you want 10% more sales next year will that mean 10% more people? Will it mean 25% more office space? Maybe your current office space is already crammed and you want to move at most every three years. This means thinking about your business three years from now and planning backwards. How do you get from here to their? That’s called Management By Objective or MBO.
How well does your business scale?
Increasing variable costs vs. fixed costs will allow a firm to scale better but more on that later.
Sorry to trick you with the headline, but there is NO ONE right way to run a business.
You can be a mean employer or a kind one. One who dedicates your life and business to making sure everyone is treated equitably (always a good thing to do anyway), who gives back to the local community and does well by the Earth or not. You can be religious, only deal with others like yourself or not work on the Sabbath. You may work in an office or outside. In groups or alone. You may be in a business that has not changed in 100 years or one brand spanking new. There is no one right way to run a business except this…
Make a product someone would want to buy at a price that makes you a profit.
As the motto at my local aggregate company says- “Find a need and fill it”.
Now go out there and make some sales and profits!
numia.biz
There once was an old hot dog salesman on Wall Street. He sold his hot dogs to the brokers through thick and thin. Neither rain, fog, hot sun or cold snow would stop him from showing up each day and selling his hot dogs from Sun up to Sun down.
He even worked weekends selling to tourists.
He saved all the money he made and helped put his son through collage and get an MBA.
One day his son showed up and said he was doing everything wrong. His business methods were out of date. In addition, interest were going up, commodity prices were rising and the economy was in the worst recession the son had ever seen.
“Oh my” said the old man. “What should I do?”
Cut inventories immediately, stop giving away free mustard & ketchup with each hot dog, and move to a better location.
The old man did as he was told. Needless to say, people liked having a choice of kosher, polish, Ball Park and extra long hot dogs, no one charges for condiments and the new location was terrible.
He went out of business.
The moral of the story is:
Hard work and experience trumps theoretical business plans any day.
Have confidence in yourself.
numia.biz
Now is a difficult time to start a business. We may be in a recession. Unemployment is up, interest rates are up, prices of many many commodities are up up up.
On the other hand, starting a business during difficult times may be the BEST time. In fact:
- 16 of the 30 corporations that make up the Dow Jones industrial average got their starts during recessions.
- Disney began during the recession of 1923-24.
- Hewlett-Packard was begun during the Great Depression (in 1938).
- Microsoft began during the 1975 recession.
More new businesses are started by small entrepreneurs during difficult times then during good times. Why?
Well for one thing, more people (including you?) may be unemployed now. Why not start your own firm while continuing to look for a “real” job. If someone hires you then put the new start up on hold, if not, continue with the new idea and see if it takes off.
Resources like cheap rent, flexible terms on supplies and other people willing to work for free are more available during hard times then good. Take advantage of them.
People are looking for new solutions to help them. During good time, people are relatively flush with money. They spend without thinking or comparison shopping. Just doing the same routine that has worked well for them to date. When difficult times strike, it makes people reevaluate their incomes and lifestyles. Foreign vacations become “Visit the USA”, Friday Night Out becomes Family Night and SUVs become Hybrids. People’s behaviors are more prone to change during hard times. Take advantage of this by offering solutions the make their lives easier.
Offer something FREE, like numia.biz. Saving money is always appreciated.
