If you scale a business there is a high probability your margins will drop!
How can this be? I build a bigger, better, stronger business and my net margins drop?
Because wastage creeps in. Costs explode and you end up with more bodies, more space, more equipment. But here is the reality and the missing secret sauce -Alignment is missing.
Having a great strategy is just not enough. Passion and commitment to your strategy is essential but you will fail without careful operational alignment to the tactics needed. The operational playbook to make magic happen is so rarely executed with skill.
Keeping your positioning and your strategic direction simple is key. But creating a multi-layered, aligned, and practical set of tactics that delivers the dream is really tough. One aspect dear to my heart was encapsulated so well by one of my favorite thought leaders Seth Godin – tactics need to reflect the patience of someone who cares about reaching a goal.
The solution – connect all new costs to the creation of new sales. I mean all costs.
If you see a clear path to new sales from your investment then you’re in a great zone. It’s a start-ups mentality. Zero-based budgeting. Lean thinking. Making every move count. It will require mental toughness and rigor. It will require really smart scenario planning about all the possible outcomes from your investment. It will require a smart financial model that mimics the economics of your business.
As a leader give yourself these type of questions:
- As you add a new software engineer, new resources to build out the functionality of your product, ask – will the customer notice? Will they pay more?
- Are you measuring the profitability of each product/service stream of your business? So easy to add costs to the most unprofitable part of your business.
- Can you justify the new production facility on the basis of new work coming at you?
- Are you killing the effectiveness of a role by giving that person two jobs? Is it time to justify two jobs with stretching goals?
- Are your departments correctly resourced and balanced. e.g. having 12 inside sales professionals and one sales engineer is not going to cut it. Do you have a part time bookkeeper when its time to have a young CPA who would bring you insight into the economics of your business (after training).
- Are you measuring the right stuff because what gets measured gets done. Become passionate about justifying Return On Investment (ROIs) on everything that moves.
In simple terms it’s about keeping every person and every process aligned. Aligned to the strategy of the business. Aligned to generating new business. Over the coming months I will share what has been working in the field as I help scale four Inc. 5000 honorees. Each business offers a wider entrepreneurial audience some real practical help including what didn’t work.
I’ll also be sharing some of these thoughts in Boston in March at the annual Business Fundamentals Bootcamp seminar (more details later).