Most people have heard the saying, “If your business isn’t growing, it’s dying.” This is generally interpreted that you need to increase revenue year over year or risk suffocating under the weight of your ever-increasing overhead.
As expenses increase, the need for revenue becomes more urgent, which painfully leads to more expenses. Margins slip, debt increases, and desperation sets in. There’s no sweet spot where income and overhead reliably generate higher net profit.
Your new mantra should be, “If your business isn’t scalable, it’s dying.”
Scalability is the ability to operate profitably at ANY level of business. We introduced that HERE.
More importantly, scalable businesses enjoy a higher percentage of net profit as revenue increases. How is that possible? Scalable business can operate with lower overhead because they adapt processes that require fewer internal resources to deliver their services.
Scaling has two directions. We usually only want to talk about scaling up. No one wants to talk about scaling down. But if scalability is a measure of success, we have to embrace downscaling as a necessary season of business. The trick is knowing how to downscale successfully.
Scaling down needs to be part of your business strategy because the point of being scalable is that you can move in either direction easily. People don’t like to talk about regression, but if you build a scalable company, the conversation about regression will be less painful.
If your company isn’t scalable, you start thinking about downsizing and all the pain that goes with it. If the thought of having less revenue next year (intentionally or not) gives you anxiety, you haven’t developed a scalable business model.
Downscaling isn’t necessarily a bad thing. It can be a healthy response to an unhealthy situation.
Why Scale Down?
There are many circumstances in which scaling down is advisable. You might lose a major client that accounts for 40% of your business. You might suffer a health crisis — either in you or a loved one. There could even be another pandemic!
But the most common reason for downscaling is the need to run at a lower revenue number to optimize profitability. Common sense sometimes dictates that you can make more money by accepting less revenue.
I can’t tell you how many clients I’ve seen come to the realization that revenue isn’t everything. “My company would make more money and I would have a better life if we just did less business,” they say. “How quickly can we do that?”
But they can’t do it — not quickly, at least. That’s because their business isn’t scalable. Downscaling would cause massive layoffs. They might have to find a smaller building to lease and sell off inventory. In short, they have too much infrastructure in place to downsize quickly.
Bottom line: The optimum size of an organization is having enough resources to sell, plan, and service the volume of business that will deliver a good profit.
In order to achieve this, you have to be scalable in both directions — up and down — as the circumstance requires.
The Keys to Successful Downscaling
Most people are better at forecasting than they think — they’re just not comfortable with the amount of uncertainty involved. But you need to forecast. The more you do so, the less uncertain you’ll be.
Forecasting will tell you how many resources you need to have in order to service what you’re going to sell, and let go of what you can. Letting go of what you can means that before you find yourself selling beyond what you have the capacity to service, you should stop selling.
Part of letting go is letting go of business. In other words, don’t say yes too often.
Master Cash Management
If you’re uncomfortable about cash, it’s going to affect your ability to sell, and it’s going to color how you deliver. You’re either going to overdeliver or cut corners, and neither is good business.
Poor cash management makes you insecure in too many areas. You need to sort out your cash problem if you want to build a scalable business.
Let Go of What You Can Revisit
Owners get hung up on what they need to let go to downscale. “This employee has been here for 20 years.” “I promised this.” “We always said we would do this.” The list goes on.
My response to this thinking is always, “If you could start your business over today, knowing what you know now, and you didn’t have any of these people, resources, things, or customers, what would you do?”
Ask yourself that question. It’ll help you look objectively at the value of making difficult decisions to get to a scalable business model. You have to let go of unscalable elements that may only have an emotional or traditional connection.
Everybody has an anecdote about why downscaling won’t work. These are almost always based on a bad experience they or somebody they know had.
The key to successful downscaling is to use your whole experience as it applies to your current situation. Stay in the present, not the past. Make decisions about what you should be doing now.
But remember that downscaling shouldn’t be an emotional decision. It’s a business decision, and nothing more.
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