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Is Your Business the Right Size?

March 23rd, 2011 · No Comments · Entrepreneurship

Big Ideas:

  • Is your business the right size?
  • Are you expanding to satisfy your ego or because it is essential for your business?
  • There is a right scale for every business, straying from that point will harm your economic viability.
  • For most businesses, there are diminishing returns on investments in staff or technology.

Is your business the "right size?"Bigger is not Better

Talk to any entrepreneur and you will find someone that wants to grow a business. There is a natural assumption that bigger is better. Bigger may be better for our egos, a fifty employee company sounds much better than a five person company, the problem is that bigger is not always better for our bank accounts.

My wife and I ran a small service business for about ten years. In the beginning we worked hard, cared a lot about our customers and grew steadily. It wasn’t long until we were making a great income and were turning customers away.

Then we started to expand. We hired more staff and opened new locations. We noticed immediately that every new employee or investment we made contributed less and less to revenues and profits. The work my wife and I could do with minimal hassle, required 3 or 4 outside staff or would require exorbitant salaries to attract rock star talent. The worst part was that my time was being spent on boring administrative tasks that added little real value to our customers. Suddenly I was focused on hiring, training, managing, sales, marketing, accounting and countless other tasks that kept popping up. By expanding, my wife and I were working more and making less money.

Sure it was foreseeable that we could have reached a point where we could have afforded to hire staff to do all the administrative work, but that was not an incremental growth level. It would have required us to be 5 or even 10 times bigger than we were. It would have taken a lot of time and money to reach that higher level, and even then it was very likely that we would have been too big for the market to support.

Eventually, we decided against the growth and scaled back to just the two of us again with non-essential work like accounting, web development and graphic design outsourced to professionals. We made more money with shorter work weeks, longer holidays and much less hassles.

The Right Size

In the blog post, An atomic theory of business size, Seth Godin points out that a business can not only be too big, but it can also be too small.

Rightsizing your business is one of the most important decisions you can make. Just because you’re thriving at one scale doesn’t mean that a little more effort or a little more investment magically take you to the next. They probably don’t.

Several times I’ve run businesses that the market liked but couldn’t find the right scale… adding more people didn’t add a significant enough amount of revenue, and fewer people would have cost us our customer base. Just because it’s a good idea doesn’t mean that there’s a scale that works.

How to Really Get Big

Growth for growth’s sake is foolish. If you have a successful business that is generating good profits and it is work you enjoy than be happy where you are and invest your free time in projects you enjoy.

If you really need to change to the world, than look for a better business model. With innovative uses of technology and new business models, it certainly is possible for small teams to accomplish amazing things. However, it is unlikely that any company will miraculously achieve phenomenal returns just by scaling the old business model. Doubling staff will not double sales, and it definitely won’t double profits. Doing more of what you did before will only bring more administrative hassles.

Action Items:

  • Is your business the right size?
  • Is your optimal profit level at a higher or lower revenue level?
  • If your business can’t effectively scale up or down, are you satisfied at the level you are at?
  • If you can’t find the right scale, maybe it is time to completely reinvent your business model?

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