You might be an entrepreneur trying to start a new business or a venture capitalist being asked to provide funds to an emerging company. Either way, it is important to find out if your business is scalable before moving forward with the venture. What exactly does this mean? Simply put, scalability refers to a company’s capability to function and perform under an increased or expanding workload. In order for a business to be scalable it must be able to maintain or increase levels of performance when faced with increased operational demands. A scalable company can maintain or increase profit margins while sales volume increases. The principle of scalability is important because it shows a company’s ability to grow without be impeded by its size or available resources. If you want to know whether or not your business is scalable, here are a few ways to tell.
Will Your Revenues Cover Operating Costs?
In order to determine whether or not your business will be profitable over time you must first determine what it will cost to start up the business. In addition to initial start-up costs you will also need to determine how long it will take before the business begins to generate revenue. Once revenue is generated, will the revenue cover the operating costs? If you are planning to open your business in more than one location it is important to factor in the start-up costs for each and every location. Will your business still be profitable even after you calculate all of the start-up costs?
What are your ongoing operating costs?
As your company grows, so, too will the monthly or yearly operating expenses. It is necessary to determine how these expenses will increase as your revenue and customer base expands. Certain business are extremely scalable because the operating costs are relatively fixed and do not increase as the business grows. In other words, they add significantly more customers without increasing costs. This allows their profit margin to increase over time.
How long will it take to generate significant profit?
It is important for businesses to consider this concept on the front end. How long will it take before you begin to see profit and what level of investment will it take to sustain the business in the meantime? Will you have the financial capability to do so? You must consider this length of time to ensure that you and your investors have what it takes to make the climb before you finally reach the peak.