The difference between Growing and Scaling your business and why it matters

The difference between Growing and Scaling your business and why it matters

The Government’s Brexit plans have, rightly so, looked at the conditions for start-ups and scale-ups to thrive in Britain. However, the more I speak to people about the initiatives and how they hope to use them to grow their business the more I realise there is confusion as to what a scaling business is.  So what’s the difference between growth and scaling?

The difference between growth and scaling

You grow a business by bringing in new customers and selling more to existing customers.  Typically as your revenue goes up so do your costs, as you bring in the resources that you need to deliver your products or services to your growing customer base.

This is where the difference between growing a business and scaling a business becomes apparent:

  • Growth focuses on increasing revenue with the current business model.
  • Scaling focuses on increasing revenue whilst adapting the business model to maximise profit.

 

Whilst growing a business can be very successful, it can lack the sustainability or profit that you may have been expecting.  That is the difference between growing and scaling.  Scaling is growth that is both profitable and sustainable.

Why is it important?

As you grow a business using its existing business model you will find that costs rise at roughly the same rate as your revenue.  That means that you need more working capital, which has a negative impact on your cash flow.  And as we know, poor cash management is one of the primary reasons that small businesses fail.

How is scaling different?

If you adapt your business model to reduce the cost of delivering your product or service as you grow your business, you will increase your margin.  So while your growth will still have an impact on cash flow, it will be much more manageable.

An example:

Let's look at a simplified example based on the impact of scaling vs growth on profit.

We will assume a small business that has revenue of £500,000, costs of £400,000 and profit of £100,000.  After 3 years of growth with both revenue and cost rising at +20% year on year. profit will have increased by 73%.

Start

% Annual IncreaseYear 1Year 2Year 3

Profit Increase

Revenue

500,000

20%

600,000

720,000

864,000

Costs

400,000

20%

480,000

576,000

691,200

Profit

100,000

120,000

144,000

172,800

73%

Margin %

20%

20%

20%

20%

 

Take the same business with the same assumptions, but instead of costs increasing at 20% assume that we adapt the business model to embrace scaling and costs rise at 5% year on year.  After 3 years the profit has increased by 300%.

Start

% Annual IncreaseYear 1Year 2Year 3

Profit Increase

Revenue

500,000

20%

600,000

720,000

864,000

Costs

400,000

5%

420,000

441,000

463,050

Profit

100,000

180,000

279,000

400,950

301%

Margin %

20%

30%

39%

46%

 

More importantly, costs will have gone up by 33% less whilst scaling, resulting in a much more manageable impact on cash flow.  It is a simplified example but provides a good illustration of why scaling provides profitable and sustainable growth.

Looking for more information?

We like Growth vs Scaling published by Fundable and of course there is the Scale Up Institute.

Jon Kandiah
Jon Kandiah
jon@scaleupstrategist.co.uk

Having spent 25 years in senior executive leadership roles, transforming large-scale businesses such as EE, T Mobile, Orange and Virgin Mobile (which achieved £500m revenue in 5 years and a £850m flotation); I have developed a range of tried-and-tested strategies, coaching and mentoring techniques that will equip your business and team with the skills necessary to scale up.