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For almost any startup, scalability is a necessary criterion, as it defines how easy it is for your company to grow. Most investors won’t touch a company if they think it isn’t scalable.
It was this quality that made Whatsapp a 19 billion dollar company serving more than 900 million users, all while having 50 engineers working on the platform.
However, scaling a company is never easy, and if done improperly, it can cause more harm than good. Some companies have been ruined because they failed to do it right.
Scaling can affect a company’s finances, operations, employees, or even its relationship with its customers.
Here are some common problems for you to avoid.
Financial Problems
Any entrepreneur fears financial problems the most. You can expect some of the following if you fail to scale properly.
Problems With the Cash Flow
When a business is just getting off the ground, it is often difficult to keep on top of the expenses. They often fluctuate wildly, and the required initial investment tends to be larger than anticipated.
Consequently, many entrepreneurs and small business owners live on credit as they try to become self-sustaining.
The problem is that, as a company begins to scale, its revenue and cost go up together. After all, scaling means hiring more people, getting a larger office, and investing more in marketing.
To make matters worse, a lot of the income generated by startups comes in the form of receivables that are due in a few months.
As a result, businesses may find themselves in a position where there is more cash flowing out than in. If a similar situation persists for several months, it can spell disaster for the company.
So, business owners and entrepreneurs should be prepared for a period during which their cash flow is crunched.
They can keep their own reserves for a rainy day, or they have a back-up plan that includes raising cash from various sources like equity investors and bank credit lines.
Moreover, it’s crucial to have a variety of clients because if one of them pays late, others will pick up the slack.
Shrinking Profits
Another problem with scaling is that profits could shrink while the business owners are too busy meeting the excessive demand to notice.
We’ve already mentioned how trying to meet the extra demand translates directly to tackling increasing costs. However, the relationship isn’t always linear.
If the scaling isn’t well-planned, business owners might find themselves facing unanticipated expenses.
They might have to pay their employees for overtime, their suppliers for faster delivery, or their utility company for more power.
Inventory costs are also prone to shooting up as businesses develop a greater need for parts and goods, which might overburden their current storage facilities.
All of these increased costs will eat at your profit margin if you’re not careful.
Ineffective Tracking of Finances
As a company begins to scale, it will also have to do more to keep up with this new level of growth, from buying new equipment, bringing in new personnel, to looking for new office space.
The company will have to create new departments to help manage the business, departments such as HR, PR, and CSR, and the activities it chooses to outsource.
As a result of all of this, while it might have been possible for the owner to keep track of the company’s finances themselves when it was still small, that becomes almost impossible once the business grows past a certain point.
Still, an entrepreneur must have an overview of the financial health of the company, so an accountant is an indispensable role in a scaling company.
Operational Problems
In addition to financial problems, scaling can create issues in the way a business is run. Let’s take a closer look at what can occur.
Inefficiency
If a business grows too quickly, business owners might find themselves having to improvise and think quickly on their feet to meet the excessive demand.
However, with too much improvisation, a company risks veering away from its original plan and wading into uncharted territory, one where the operations aren’t as smooth as they should be.
What would this look like?
For starters, when a business is still small, it doesn’t need a strict organizational chart.
Everybody knows what they should be doing, and single individuals can occupy entire departments on their own.
Moreover, everybody has access to everybody else so that any problems can be resolved quickly through coordination between departments.
This all changes as the business scales.
For instance, if a business has to hire too many employees to meet a surge in demand, it might inadvertently hire people who aren’t the right fit for the company culture.
Moreover, some employees’ functions can overlap, creating unnecessary redundancies.
Additionally, a sudden influx of people forces a company to redesign workflows to avoid unexpected bottlenecks.
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To make matters worse, communication channels become slower, hindering inter-departmental efforts.
All of this will adversely impact the company at large.
Technology
As it scales, a company needs to adapt its technological infrastructure to meet its evolving needs, including storage and data needs and connectivity requirements.
Scaling companies tend to automate several processes, which means needing specialized applications that can handle automation. Most of these will be hosted on the cloud.
For many business owners, the problem is the lack of awareness of their business’s ever-changing technological requirements. They end up investing too much or too little, both of which can be devastating at this critical stage.
Hence, it is advisable to hire an IT employee.That person will help you figure out what your needs will be and know how to address them.
Whether you go for a ready-made solution or have a piece of software custom-built, it needs to be able to scale along with your business to handle new users and a surge of new data or processes.
If you opt for creating in-house software, consider using cloud technology, making the software accessible from anywhere on the planet.
This will allow you to hire people from different parts of the globe rather than having to focus on individuals within your geographical region.
Personnel Problems
As demand increases, so does the workload. Companies tend to meet this rise in one of two ways: demanding more from their current employees or hiring new ones.
However, each choice comes with its own drawbacks and risks.
Overworked Employees
When employees start working so much that their social life begins to evaporate, this starts taking a toll on their mental and physical health.
As a result, their job satisfaction plummets, which only increases turnover. This can cost you your best employees.
If some of your employees decide to leave because the stress is getting to them, the remaining employees will have to work even harder, creating a vicious circle.
Hiring New People
As mentioned earlier, the risk with hiring new people is that you might take on employees unable to fit into the business culture.
When demand skyrockets, businesses rarely have time to vet every candidate and sure that they would make a good fit.
Your job as a business owner becomes a balancing act. In other words, you have to know which positions need a perfect fit and which positions can afford a little compromise.
Try to get familiar with the best hiring practices to keep on top of the process.
Customer Service Problems
Employees aren’t the only ones who feel the change when a business starts to grow. Customers will also notice, especially if the business stops taking care of them as it once used to.
You will start seeing this for yourself when the negative complaints start piling up.
Why does this happen?
There are a couple of potential reasons. Perhaps, the company’s employees are already overworked, so customers are starting to slip through the cracks.
The business might be serving so many customers that some of them just get lost in the middle of all the chaos.
Alternatively, as the business strives to meet the rise in demand, the quality of its offerings just starts to plummet, since the business takes its customer base for granted.
Whatever the reason, unsatisfied customers can be dangerous. Not only do they end up taking their business to one of your competitors, but they also speak poorly of you, deterring others from doing business with you.
How to Sail Smoothly Through the Scaling Phase
Even though there is no single formula that will guarantee that you will make it out of this phase unscathed, there are a few key principles you always want to keep in mind.
For starters, you want to decentralize your operations as much as possible. In other words, you need to empower employees and give them the necessary authority to make decisions.
You also want to maintain reliability and to make sure that your quality of service never falters.
However, to achieve this, you also need to make sure that your suppliers and the services you use are reliable in turn, and that they can manage the increase in demand.
In any case, simply being aware of the areas in which the most common problems tend to occur and what they entail will help you overcome them and scale with success.
Ashley Wilson is a content creator, writing about business and tech. She has been known to reference movies in casual conversation and enjoys baking homemade treats for her husband and their two felines, Lady and Gaga. You can get in touch with Ashley via Twitter.