Do you remember why you decided to become an entrepreneur? Do you remember the way you felt when you acquired your first client?
Entrepreneurship can be a romantic concept. Central to the idea of entrepreneurship is the concept of building an enterprise which runs efficiently and delivers consistent profitability. The reality is, however, that most small businesses remain small businesses forever with the owner-manager being heavily involved with day-to-day operations. Unless you can scale up your business you may have just gotten yourself a very demanding job with limited financial upside.
Though many of our readers are in Canada, statistics from our neighbours to the south show us how scaling a business is obviously a huge challenge for entrepreneurs. Only 4 percent of the companies in the United States have annual sales that exceed $1 million. Of the 27 million businesses operating in the United States, fewer than 700,000 have 20 or more employees, and 21 million of those businesses are operated as sole proprietorships without any employees.
So what is holding most entrepreneurs of service companies back from scaling up? Until recently, I was convinced that the answer to this question was mostly business dependent. After reading Verne Harnish’s Scaling Up, my views have changed. Many businesses that you might think are destined to remain small businesses may someday surprise you and dominate an industry.
Whether or not your services business will be able to successfully scale up depends on your discipline and focus as an entrepreneur. Harnish breaks down the concept of scaling up into four categories which include people, strategy, execution, and cash.
Whether you are a painting contractor, a home-based cleaning company, a landscaper, an electrician, or you own any other services business for that matter, you should be thinking about these concepts if you want to scale up.
It is no surprise that scaling up requires that you get the right people into the right roles in your company. But perhaps, historical team-building practices should not be used.
Owners of service-based businesses often confuse leadership skills with technical skills. While business know-how amongst senior team members can be critical to your success, do not discount those from other industries simply because of a lack of direct experience in your business or industry.
Though promoting from within has a higher probability of success, an employee that works hard, and has strong technical skills may not be the right person to lead a business unit or team.
Before promoting a team member to a leadership role, prepare a job description or scorecard for the role clearly identifying the accountabilities for the role and the metrics that that should be used to evaluate whether this individual has achieved success. Then make sure to interview a number of candidates externally and internally before making your decision.
Having the right people in the right leadership roles will help you carry your business to the next level and execute on your strategy to scale up.
Suppose that you are a painting contractor with a few crews and that you wish to expand the number crews to meet growing demand. You would probably be best served by hiring an operations manager to oversee the expansion. This does not necessarily have to be someone from with paint industry knowledge.
Good, sharp, business skills, an eye for detail, and an entrepreneurial drive would be an asset in this role. This individual could be more inclined to think holistically about your business when making decisions. In addition, without pre-conceived notions governing their decision-making process, this individual could bring a more innovative approach to problem-solving.
This part of Harnish’s book focuses on values, competencies, and purpose. Practically speaking, you know what you do best and how best to make money at what you do.
However, as an entrepreneur, your vision may get clouded as you focus on day-to-day cash flow needs. But if you step back and think about scaling up your business, would it not make sense to focus on those things that you do best?
If you are a plumber, perhaps you split your time between residential and commercial work. While commercial work may be lower margin work and highly competitive, you have carved out a reputation for your business in a specific market with homeowners. Maybe it is time to pay more attention to the residential side of your business as you scale up.
If this is your business, I am not suggesting that you should simply walk away from your commercial work. No rational entrepreneur would do this, and I certainly would not! However, when thinking about scaling up, maybe you should focus your energy towards the residential side of your business. This higher-margin work may allow you to create a steady stream of income that brings stability to your business with consistent cash flow.
This section of Harnish’s book contains a number of great tools and checklists to ensure that you are on the right track. Alignment, communication, and ongoing employee input are critical to your success in executing on your strategy to scale up.
I believe that one often overlooked area in services businesses is technology. Using the right technology can help you significantly improve the efficiency of your operations. Yes – your operations can function without these tools, but performance and operations can be greatly streamlined with the right tools.
One such tool that I have seen for services businesses is Jobber. Jobber is a tool for mobile services businesses. It provides teams with time-tracking tools, shows your team the quickest route to their next job, and provides a scheduling management system. The list of features goes on. Jobber will bring a level of technological sophistication to your business that is necessary to scale up.
In addition, since Jobber integrates with QuickBooks Online and Xero, your business can benefit by automating a number of tasks that were previously done manually and probably overseen or done by you.
Freeing up your bandwidth to focus on driving the business forward is critical to scaling up.
There are a few central themes to the cash section of Scaling Up that you ought to think about carefully. Cash flow management is frequently cited as the most significant challenge facing entrepreneurs.
Harnish references the concept of the cash conversion cycle. Quite simply, this is the notion of getting cash in the door as quickly as possible and deferring payment for business expenses for as long as possible. Harnish encourages entrepreneurs to not get into the trap of thinking that the pace at which you collect cash is simply an industry norm.
The cash conversion cycle measures the number of days that it takes for a dollar spent in your business to make its way back into your pocket. The quicker your cash conversion cycle, the better you will be at funding growth internally rather than requiring external investment.
There are lists of things you can do to improve your cash conversion cycle. For your services business, this might include the following:
- Offering a discount for early payment – if you are in the lawn care business, why not offer your clients a discount for paying at the beginning of the month or season?;
- Providing customers with the option of paying by credit card – this comes with high fees, however, usually means getting your money quicker; and
- On the expense side of your business, use a credit card where possible so that you can defer payment for expenses by a month.
Scaling up your business
If your business is not growing and expanding, perhaps you have not structured it to scale up. There is no reason why your business cannot become one of the 4% of businesses capable of generating more than $1 million in annual sales.
We provide small to midsize business owners with cloud-based bookkeeping services using tools such as QuickBooks Online so that they can get back to growing their businesses. Our services include bookkeeping, payroll management, receivables and payables management, and document management. At Enkel, we are passionate about service-based companies and believe that with the right disciplined leadership, there are significant opportunities to scale up. Having an efficient backoffice is part of the winning formula.