In business, growth is seen as a good thing – an essential, in fact, that directly influences the perception of a company.
If a company is growing and expanding, with revenue to match, the company is seen to be performing well. If growth has stalled, then this is often taken as a sign that there is trouble on the horizon.
Due to a belief that growth is never anything but positive, entrepreneurs who have enjoyed initial business success will soon begin to consider upscaling their operations. While upscaling is positive in many regards, it can also have negative repercussions – particularly in terms of costs.
The risk of focusing in the wrong areas
If you are considering upscaling your business, you will likely spend a huge amount of time calculating the return you can expect to achieve. In doing so, it’s easy to fall under the spell of the positive numbers.
If you upscale in order to increase the amount of work you will complete, your company’s projected revenue will – of course – increase accordingly. To any business owner, greater revenue is incredibly attractive, so you will likely move forward with your plans to upscale your business as quickly as possible.
However, what many business owners forget is that while their income will rise due to upscaling, their costs will also increase significantly. If you’re producing work at a higher volume, your company will be working more – and that means that you’ll pay more in energy costs due to the higher workload, may need to hire more staff, and potentially even move to larger premises, to meet demand. If this increase in costs is not offset by the increase in revenue, you could find yourself in a difficult scenario: your business is technically larger due to upscaling, and its revenue has increased – but your profits have remained the same.
How can you decide if upscaling is worth it?
Here’s an example, using simple numbers, to demonstrate the point:
- Current business revenue is £100,000 per annum.
- Costs are £50,000 per annum.
- If the business were to upscale, business revenue would increase to £125,000 per annum.
- However, costs would increase to £75,000.
In the above scenario, the business’ fortunes are technically improved: they are now earning an extra £25,000. However, as they are also spending £25,000 extra per year, the total profits from upscaling are £0.
Importantly, this means that the business has not actually grown at all; it might be doing more, but its profits have flatlined.
The above example demonstrates how upscaling quite literally comes at a cost – and it’s up to the business owner to ensure that the costs are worth it.
How can you ensure the cost of growth is worth it to your business?
Simply put, the only way upscaling is worth it is if the gap between the projected revenue of the business and its costs is large enough. In the example above, the gap was £0, as the revenue rise was immediately cancelled out by the costs also rising to cover the extra workload. However…
- If the costs were to increase to £75,000, but revenue increased to £130,000, then the “gap” would be £5,000 – and thus the business enjoys £5,000 in extra profits as a result of upscaling. <
- Alternatively, if the costs were only to increase to £55,000 and revenue were to still increase to £125,000, the gap would be £20,000, and thus the business would be £20,000 better off due to upscaling.<
Essentially, you have to see the two figures – projected income and projected higher costs – as a kind of see-saw that has to balance in your favour, in order to ensure that upscaling is actually a viable choice.
Is it better to try to reduce costs or to increase revenue?
When deciding to upscale, all of your figures will be estimates; they may be influenced by experience and knowledge, but they’re still just estimates. <
As a result, it is good practice to apply the best case scenario to what your business can control. In this case, your costs are under your control; you can look for a better deal on your business energy, choose how many new staff you wish to hire, and so on – you’re in control of how much you spend. In contrast, revenue is dependent on others; on your customers buying your product or service; on the economy being strong; and a number of other factors you cannot directly influence.
When considering upscaling it is, therefore, best to seek to maximise your “gap” by lowering your costs rather than seeking to raise your expected level of revenue.
Upscaling – and the growth it should provide – can be incredibly beneficial ways to advance your business, but only if you balance your costs and revenue to ensure such a venture is worth the effort.