A fast-growing business that’s losing money seems like a paradox: how can a company be growing rapidly without making a profit? This is a question that many start-ups are asking. Armed with innovative ideas, these start-ups aren’t lacking cash from investors. What they are lacking is a profitable business model.
If your start-up has raised a lot of capital at the initial investing phase, you may not feel the urgency to think about a long-term path to profits. Your mind may be set on using the funds to build saturation and then hoping for the best, but simply crossing your fingers that spending will lead to profits is not a smart business decision.
Take the case of Uber: the ride-share company has failed to make a single profit in the decade they’ve been in business. They’ve built their business model on the idea that profits will come with momentum. However, the reality is that Uber isn’t making enough money from fares to pay for its revenue and operating costs.
While this type of business model, where money is first spent then made, is not uncommon, with companies like Amazon leading the pack, the difference is that these other companies have set up infrastructure to grow and have a competitive advantage that their competitors can’t touch. In short, Uber didn’t scale their business model for growth. They’ve now lost $5.24B in Q2 after post-IPO stock payouts, in part thanks to their unsustainable business model.
To avoid a situation like that, you’ll need to build a scalable business model with a path to profitability. In this blog, we’ll tell you exactly how!
Low-cost, high-profit: that’s the goal to keep in mind. Successful long-term growth depends on a scalable business model. Scalability entails cutting costs while making key business processes more efficient as the organization grows.
After you start building a client base, avoid sprinting to expansion right away, whether that be to new markets or new locations. Take a step back and with your finance team, discuss how your business model affects the bottom line during rapid growth. Ask yourself if your organization requires more input (i.e. more employees) to create output (i.e. sales) in order to grow, as this is something you want to avoid. Instead, you want to grow exponentially: as sales increase, consider the ways you can keep costs flat, allowing for higher levels of profit over time.
For some companies, especially tech start-ups, this begins early on: their initial costs for developing a product are high, but once it has been created and consumers are purchasing, there are minimal related costs.
Add Value, Not Labour Hours
Does your company provide a service? It can be more difficult to scale your business if your services rely on workers and their hours. If you can, find ways to add value to products/services you already offer or generate supplemental revenue without raising the cost of labour.
Another method to create efficiencies would be to offload work onto software. For example, use cloud software to speed up the rate of work. At Qmulus, we have partnered up with cloud-based technology solutions, such as Wagepoint and Quickbooks Online, to offer accounting and bookkeeping services that ensure efficiency and accuracy.
Outsource, Outsource, Outsource
Scaling can also mean outsourcing what is non-strategic. Don’t outsource your core competency, but don’t try to do everything in-house. Why spend time and money trying to grow the expertise you need? Instead, focus on what you do best and outsource departments, like accounting and bookkeeping, to leverage outside expertise.
You may be thinking at this point, does it make sense to scale my business? To be clear, not every business or startup needs to be scalable. Perhaps your vision for your small business is to keep it small, local, and successful. Not to mention that not every business is designed for such scalability. This is a strategic decision that you need to consider before moving forward. If you do decide to scale your business model, we can be your outsourced finance department. We offer business consulting meetings where we can create a financial plan that works for you and train you on all the software you need to succeed. Reach out to us at 647-476-2145 or schedule an appointment.