Every small business owner wants to run a successful business. But the more ambitious ones dream of one day expanding beyond one location and a handful of employees.
Whether it’s selling in new markets, developing new products or opening up additional locations, scaling a business is not a decision that should be made lightly. Countless small businesses have tried expanding before they were ready, only to struggle with properly managing a larger company.
So before you sign on the dotted line for a big new expenditure, here are three pros and three cons to scaling your small business.
Pro – More revenue
Many business leaders choose to scale because they believe it will bring in revenue. This is generally true. Selling your product or service to more customers and more markets will typically lead to more cash flowing in. This could mean a bigger paycheck for you and your employees. It could also mean your company finally has the resources to invest in a new website or to hire a communications firm, allowing you to grow at an even faster rate.
Con – More expenses
However, just because more revenue is coming in doesn’t automatically mean your business will enjoy bigger profits. Every additional storefront or product initiative comes with an added cost and it can be difficult to predict exactly what those costs will be, especially in the short-term. For instance, opening a new location might mean more consumers have access to your product or service. But the location may be difficult to access, or there is too much competition, or you simply underestimated the local population’s demand. These are all important variables to consider.
Pro – Economies of scale
One of the main reasons small businesses choose to ramp up their operations is economies of scale. Investopedia defines “economies of scale” as the “cost advantage that arises with increased output of a product.” In other words, the cost of creating one unit (a sandwich, a handbag, a haircut, etc.) goes down as the company produces more of those goods or services.
Creating economies of scale is one of the best ways to boost profits. If you can produce 100 units of something for the same price that it previously cost you to produce 75 units, then those extra 25 units are pure profit.
Con – Supply chain management issues
However, just because there is the potential for economies of scale, doesn’t mean your business will necessarily achieve them. Managing a larger business is hard and it takes many years of experience to maximize every efficiency—or even a few efficiencies. Supply chain management involves streamlining a business’ supply-side activities to maximize customer value and to gain a competitive advantage in the marketplace, according to Investopedia. Every part of the chain needs to be operating smoothly to ensure that there aren’t delays or other problems along another segment of the chain.
This is especially true of restaurant – or hospitality-oriented businesses. If a shipment of king crabs is late, then a restaurant needs to take a potentially popular dish off their menu. If the shipment is too early, then the crabs might spoil before they’re needed. Either outcome could be potentially disastrous for a business, so be sure you can handle the added layer of complexity before expanding.
Pro – Larger workforce
Many small businesses rely on a small, tight-knit staff, many of whom have likely been with the business since it started. With such a small staff it’s difficult to do anything other than focus on the day-to-day operations of the business. Fortunately, scaling your business often allows you to also expand your workforce, whether it’s a handful of new employees or 100.
A larger staff allows your business to pursue many more opportunities from both a sales and marketing standpoint. You could finally host that event you’ve always dreamed of, or have employees work on a research project to measure how your business’ products and services are perceived.
Con – Brand dilution
The downside of having a larger workforce is that not every employee may believe in your business’ mission. This is especially true when expansion involves opening new locations. The employees you hire to staff the new location may not have the experience of working with you and your earliest employees, so they may not be as motivated—or able—to deliver the high level of service your customers have come to expect.
This issue of brand dilution can be remedied with extensive training and ongoing site visits, but it is a risk of hiring more employees.
Whether or not you decide to expand your operations, keep in mind that every business grows at its own rate. Scaling your business too early can have disastrous consequences, but if you wait too long you risk getting passed by competitors. Remember to take these pros and cons into consideration and know that BFS Capital is always there to help.