This article first appeared in Young Entrepreneur.
How to scale a business is a perennial question in entrepreneurship circles. Not only is the answer different for every company and every industry, it’s also fairly tricky.
Growth leads to increased revenue, profits and valuations. But spending aggressively on scaling anything form adding staff, regions or new products — can lead to pitfalls, pains and sometimes the end of a business.
As a young entrepreneur, knowing when to grow can play a major role in your company’s long-term sustainability. The key is to find the right balance of acceleration to maximize the business and capture market share without breaking the bank.
Here are a few tips to consider when looking to grow your startup:
Know when to scale.
Founders going for growth need to consider the markets own growth rate or the expansion of total spending in a given space. This is basically the pace car you need to beat to gain a share. While it may be enticing to jump into the land-grab race, its important for startups to focus on your product and its interest from target customers rather than growing too fast. Once you’ve nailed the product and caught the audiences attention, then it’s time to go big and fast.
Understand your cash flow and budgets.
Heres a scary thought: High growth businesses can easily go bankrupt. That horrible outcome of great product, bad business happens when growth consumes cash. Get intimate with your cash flow statement. Understand when money comes in, where it goes and when, as you don’t want to let your bank balance fall below zero. As for your marketing budget, expenses should be targeted towards activities that generate customers quickly and inexpensively. Also, try to direct more of your budget toward clients who will stay with you long enough for you to recover your initial customer-acquisition costs. This way, you’ll have a more consistent flow of money coming in.
Recognize the trade-offs.
Continue to manage the balance between growth and profitability. If you raise prices too high, too early, you could curtail growth while widening profit margins. Further, if your prices are too high, you could lose market share, as a more moneyed competitor that can afford to undercut you for longer could step in. It is a tricky balancing act but one that needs constant attention. Remember that you must continue creating value to outpace the market.
Get the capital.
Being able to sustain a company while generating losses requires capital. If you have a business that is venture-fundable then gaining VC investment provides long-term capital to continually invest in differentiation and growth. To have a top returning venture-funded company, you likely need to be at least doubling revenue every year for many years. If your company is going to grow more slowly, then seek other forms of startup capital, such as loans or starting with sweat equity from yourself and your partners. Either way, you need to focus on having a stream of capital to keep your business afloat.
Hire, hire and then hire some more.
Before you decide to go full-speed ahead with your growth strategy, make sure you startup is prepared for scaling with human capital. Do you have the team to execute in a high-growth environment? If not, the best advice I can give you is hire well. Look for folks with senior-level experience. You will have to make some hard calls, not just in hiring but also in letting go of employees whove been with you since the early days but haven’t grown with the business.