Expanding your business: what to do in order not to go broke

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Increasing sales is not always profitable, and sometimes you should refrain from hiring new employees.

Anyone who wants to earn more probably thought about scaling up the business: opening a second point of sale or a branch in another city, hiring new employees and selling a million times more. Alas, you cannot expand a company at a click: this can be very painful, right up to bankruptcy. After all, if there is a mess in business finances, then you will increase the mess, and you may not be able to cope with a lot of mess. We will tell you how to expand and not go broke.

Do's and don'ts when scaling

1. Hurry up

It usually happens like this: I looked at a powerful competitor and decided that you want to do the same right now. Doing business in this way is very risky: after the opening of new outlets, the company will definitely start working at a loss, because the growth of revenue will also increase costs.

A good example is myself. Once my friends and I opened a pancake shop in Chelyabinsk. We were making good money, I bought myself a Mercedes. Then I thought: why not open more pancakes, since everything is so good.

No sooner said than done. We took out loans - and there were six pancakes. But no one drew up a scaling plan, so the money very soon ceased to be enough even to pay employees.

As a result, I left the business with a debt of 1.5 million rubles and without a car.

2. Unnecessarily expanding the staff

It seems that the more employees a company has, the more it earns. It is not always so. Many entrepreneurs hire people, and things immediately get worse: the profit does not pay off the costs.

This was the case with our client Vladimir. He built baths alone and earned 200,000 rubles a month. I decided to scale: I hired workers and managers. There was more revenue, but the growing salary fund was completely eating it up.

An important point: the larger the company, the more positions it has. If you've had one salesperson, you can't just hire four more. You will need a head of the sales department, who will be in the position above. A sprawling office needs an office manager and so on.

3. Chasing revenue

If you only strive for revenue growth, you can miss the increase in costs and they will eventually eat up all the additional profit. Also, at a certain stage of increasing sales, the average check decreases - this also needs to be kept in mind.

Our client Denis doubled his store sales and earned nothing. He focused on the amount of goods sold so that as much money as possible came to the cashier. But if there is nothing but revenue in front of your eyes, chaos begins to reign in business. The margin in Denis's store fell because no one was following it: the supplier could raise prices, and Denis is not aware of it. Money lived in four wallets: on a current account, in cash, on accounts in Kiwi and Yandex. Money - it was difficult to keep track of profits and expenses. There was no payment calendar - it was not clear when the money would come and when to pay. In general, a complete mess.

What you need to do

To scale your business and not go bankrupt, you need to follow three simple steps.

1. Plan not only revenue growth, but also related costs

Calculate how much spending will increase if you have to produce more goods or provide more services. Don't forget about the unobvious costs: job creation, higher taxes, the necessary new jobs, and so on.

2. Calculate the financial result from hiring new employees

Imagine how much the employee will bring in and how much it will cost him to stay in your company. You will see what results a new employee should show so that you earn, not lose.

3. Find out the break-even point

This is the money you need to earn in order not to go into the red. Calculate all-all expenses of the company and add to them the reserve - this will be the break-even point.

There is a tool that allows you to do all this in no time - a financial model.

How a financial model will help

The financial model digitizes the business, that is, it presents all business processes in the language of numbers. It makes it easy to plan expansion, hire new employees, calculate a break-even point and, most importantly, understand whether you can scale at all.

1. Competently plan

The financial model brings together all the key business indicators and demonstrates how their change affects the bottom line. Play with the numbers in the table and see what happens to the profitability.

2. Hire efficiently

The financial model will help calculate the financial result from hiring an employee or show what will happen to the business if the employee's salary is raised. This will show you the results that need to be achieved in order for the company not to become poorer after staffing or changing someone's salary.

3. Calculate the break-even point

Using the financial model, an entrepreneur can understand what indicators he needs to reach the break-even point. He can either cut business expenses or increase revenue. The solutions may vary. The main thing is that the financial result is acceptable.

4. Find out if you can scale at all

The financial model helps you figure out if the growth in sales will really have a positive effect on the company, or if you need to hold back. There are business models that, in principle, cannot be scaled (and this is also figured out with the help of numbers).

If you are an entrepreneur and do not use a financial model, this urgently needs to be corrected and. Without this tool, we do not keep management records and do not advise you. Happy scaling!