Early in the life of a company, say from Day One, it’s imperative to conserve cash. This is a time of exploration and discovery.
What is your business model? Who are your customers? Which products are your top sellers? How often do your customers return and make purchases? Who are your top customers?
These are a few of the questions that will need answering and it will take time. This is why it is important to conserve cash, at least in the beginning until you discover the answers. You will likely lose money, at least early on. Discovering a repeatable business model and discovering your customers takes time with trial and error which equate to money. As you become more experienced as an entrepreneur you will get better in discovering the signs of a repeatable business model and the appropriate time to scale. Money purchases you the time required for this type of exploration and discovery. The more of it you have and the more wisely you use it, the more time you have to optimize prior to scaling your business.
Once you know the answer to these questions though, it’s time to put your foot on the gas and spend like there’s no tomorrow. It’s important to note that the answers should be quantifiable through your metrics. The best way of knowing whether you have discovered a repeatable business model and it is time to scale is looking at your revenue and expenses. If you are bringing in more than one dollar for every dollar you are spending it’s likely time to begin accelerating and scaling your business, or at least putting plans in place to do so.
Let’s use a commodity business as an example. There is little risk with a commodity business, the product is not innovative but the demand is proven and durable. Let’s say you spend $0.25 for each widget and consistently sell each for at least $1.00. The demand is there, your expenses are optimized, and you are aware of your key metrics. Now is the time to scale.
In addition to product costs it is important to note other fixed and variable expenses. These are easy to overlook, especially the small ones and have a tendency to creep up on profitability. Things like packaging, shipping materials, etc. tend to be overlooked, but should be included in your expenses.
When scaling a business you are essentially accelerating the schedule. You are infusing capital at key points to take it to the next level. This growth may or may not occur organically, but by strategic capital infusions you are shaving time off your business growth schedule, likely years, by accelerating the purchase and shipment of product to customers. There is normally a small window of opportunity here, that’s why it’s important to know the signs of when to scale through the data collected in your metrics.
1. J.R. Sedivy. Metrics: http://jrsedivy.com/metrics/