The Importance of Scale

Businesses that do not grow their revenues to achieve the appropriate “scale” will always struggle to provide the appropriate financial return to the business owner to reward the inherent risk of business.

This need for scale is universal across all business types or industries, even businesses that target “niche”, or higher margin markets.

As only one example, hospitality businesses without turnover can’t achieve their gross profit targets (65-70%) due to excess waste. The same business will also struggle to achieve the correct labour costs as a percentage of turnover, as staff rostering and retention of employees (often casual) need a minimum threshold of hours to open the doors. Rent KPI’s (8-10%) are also difficult to achieve. All of these issues ultimately lead to an inadequate bottom line reward the owner. In many cases the bottom line may even be “red ink”!

But the scale conversation is not limited to the hospitality industry. Professional services businesses like architects, consulting engineers, lawyers, accountants and surveyors, also need scale to be able to attract the appropriately skilled and experienced productive employees. Scale in these firms also allows the employment of suitably skilled employees to run the business such as general managers, finance employees, marketing managers, IT employees and HR employees to name a few. How many examples do we all know where “the professional” undertakes a share of these other small business needs of marketing, IT, HR, etc? How many of the “all-rounders” do these other functions well? Not many, is my experience.

Most businesses understand the need for scale, with revenue growth being the highest ranking strategic objective in the significant majority of businesses. But how do you achieve this “scale” when time frame is often short?

Business development plans incorporating a marketing strategy should always be one of the strategic initiatives. Growth from organic means is usually strong, but invariably slow to gather momentum.

The “quicker fix” is via acquisition or mergers with competitors or compatible businesses. The trick with this strategy is either the funding, or the very important issue of cultural alignment. Both equity/funding and cultural compatibility are required or this Merger & Acquisition solution will fail, often with serious consequences.

Scale is the goal. The means to achieve the goal are either expensive, protracted or risky. It is a difficult equation, and this is why the business owner or entrepreneur needs to be appropriately rewarded should they achieve the right balance of revenues and expenses to result in an acceptable bottom line result.

Written by Director, Chris Sneddon

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