71% of UK businesses never exceed an annual turnover of £250,000 and only 16% will ever grow beyond £500,000.* Why? Because they have adopted a business model that prevents growth, often without realising it. (*Source: UK Business: Activity, size and location, Office for National Statistics 2014). Click to read more.
There are currently 2.26 million organisations in the UK registered for VAT or PAYE or both. Of these 23% are sole traders, 90% employ less than 10 people and 98% employ less than 50 people. Whilst many of these are life-style businesses, that is those where the profits generated meet or exceed the costs of the proprietors’ life styles and they are satisfied with that, there are many others where, despite the proprietors’ best efforts, turnover peaks and net profit percentage, either remain static or reduce.
The reason for this is that most business models are based on growth rather than scaling. Take the example of a sole trader plumber. The more work he does, the more he earns, but there reaches a point where he physically cannot do any more work. So to grow the business he employs another plumber. Turnover increases, profits increase but net profit percentage remains about the same. If you graph turnover and costs and the two lines are running more or less in parallel, you have a growth model. Whilst many professional businesses such as accountants and solicitors successfully maintain this type of model, for most other businesses, despite their efforts to reduce costs, it eventually becomes too large to manage effectively and economically.
A scaling model is based on increasing turnover substantially without significantly increasing costs. This can be achieved through acquisition, rationalisation or using technology to materially improve productivity, although these routes often require capital investment.
Whilst scaling can produce enormous benefits, there are risks involved. Significant growth over a short period of time will expose and magnify any fundamental flaws in your business model, some of which may not previously have been apparent. These are often very difficult to resolve retrospectively. Time taken to accurately evaluate your potential for scaling before taking action will more than repay the investment by helping to avoid potentially catastrophic risks and identifying a positive way forward.
Call us for help to review your business model and its potential for scaling.
