The Ideal Business Size
There is a saying Small Is Beautiful and Big is Best? Nobody bestows the accolades for Medium? The only accolade for Medium I can think of is having your steak Medium done.
Do you want a business that is small and lean, Big and Boastful or Medium-sized?
I am of the opinion that Entrepreneurs should aim to move through the Medium-size business phase as rapidly as possible or even consider selling the business at this point if Big Business is not achievable soon.
Let me explain:
The ideal business size
Entrepreneurs get so caught up in their businesses, that they neglect to pay careful attention to the ideal size of their business. The one-size fits all approach is not applicable and favorable to businesses. Very few consider to stop and pay attention to where their businesses is at.
The standards for measuring business size vary across countries
The standards whereby business’ size is measured differs from country to country. In the USA you are only seen as a business owner once you have a 1000 or more employees. With anything less than that, you are regarded as “self-employed.” In South Africa where I live, having 50 or more employees and Income of R50m will put you in the medium sized bracket, anything less than that is regarded as small.
It doesn’t matter where your business is categorized officially. In my opinion, as soon as profitability wane yet your income is growing and you find the majority of your time dealing with personnel issues, compliance and other administration costs that is high, you are no longer a small business.
When it dawns on you that your business’ size is an issue, You seriously needs to make big decisions:
Either move through the “medium” sized business phase extremely fast to a Big Business or scale down operations.
Scaling down can consist of going back to simple, uncomplicated processes. It can also consist of getting rid of those unprofitable time consuming clients or product lines that are just not working. It may also be to reduce the workforce to only a few trustworthy employees.
The worst position a business can find itself is to be medium-sized business for a lengthy period and run out of money.
Experience taught me the following truth's
1. Successful Small Businesses
Successful Small businesses are in most cases “lean” affairs. The owner or a few people are doing most of the work themselves. The owner is directly involved with clients and in many cases work from home or a cheap rental space with desks donated by family members. The administration processes are simple and optimised to fit this style of business. Profitability is high and exposure risk to legislation is managed by the few people. People who are in control of the operations are passionate and competent. Employees are in love with the brand.
The profitability is high per capital and in many cases the entrepreneur or founder is at his happiest.
It takes hard work and commitment sustaining these businesses but the people working for the cause find it very fulfilling.
2. Profitable Big Businesses
The characteristics of Big Business are: Large client bases so the risk is diversified. Exposure to a magnitude of laws and compliance. Administration tasks and processes are complex with many tasks designed to keep sound internal control systems. A large workforce is at hand to deal with, BUT Big Businesses have the advantages of Scale.
Scale benefits helps Big Business to perform and absorb all those meaningless activities and stay profitable at the same time.
A very simplified illustration of how it works: Let’s say a small business buys a spade to load sand for $10. The specific spade can load one ton of sand onto a truck in 8 hours time which is sold for $100. After 20 days you would have made $2,000.
If you buy a larger spade for $20 dollars (double the costs) it can load double the quantity of sand. You can load double the amount of sand in the same time and you would make $200 dollars a day which is $4000 dollars over the same time period. Your spade will only cost you $10 dollars more. This is a simplified version of how economics of scale work. It comes down to the fact that a Big Business has the money to buy the “bigger” spade as well as he clientele to sell its products to.
Many entrepreneurs start their business with a brilliant idea. As the business grows, more and more time and costs are being demanded doing other tasks within the business, that has a very small impact on the bottom-line profit. These mundane tasks are a necessity for the of business.
The additional workload has little or nothing to do with the Entrepreneur’s originating passions and the core reason why he actually started the business.
For example you will find doctors whose core passion is to help patients and to heal people to live happy healthy lives. In reality these doctors end-up doing mundane paperwork for half of the time during the day in stead of doing the one thing they love.
Same can be applied to teachers whose core passion is to teach pupils. Teachers start their careers wanting to work with students teaching them a vital skill. They end up doing time consuming administration tasks for most of their time.
I have found that the most successful and happy entrepreneurs are the ones that are either running a very small business where they basically are just doing the core business themselves or the ones running major Big Businesses.
The unhappy owners that are making less money are the people owning Medium-size businesses.
It all start with the businesses as a very small concern. The successful small businesses are very well defined and focused on the niche they are serving. Their unique offering, adds tremendous value, making them quite successful.
Naturally these businesses grow and they progress into a bigger businesses.
The growth happens in 3 stages.
- The small business’ learning curve is easy to manage and new ideas are quickly implemented throughout the business. The small start-up businesses once established embarks on employing more people to assist with the growing number of tasks. The customer base starts growing up to a point where the founder cannot do all the things him or herself.
- Growth continuous and soon without realizing it: the small business became a Medium-size Business. Now all hell brake loose if not managed properly. Hopefully the business can progress through this phase very quickly to become a Big Business. If the business is stuck in this phase profitability deteriorates at a rapid rate and the business can end up with financial difficulties. The major reason for the lack of profit is because of Medium-size businesses don’t have the benefit of Economics of Scale.
They are also not small anymore whereby they can fly under the radar. Legislation and other issues associated with with big businesses becomes major problems. To address these, costs much more than what it costs Big Business.
Weigh up your options
If you find yourself in a Medium Size Business be careful. Consider accelerating the business to a Big Business. Do everything in your power to achieve this as this may result in having the luxury and the money to scale functions and processes that Big Business need.
The other option might be to sell the growing Medium Business. You might be surprise at the money you can sell it for.
The other option is to focus on profitability and the products and niche that made this business successful in the first place.
Whatever strategy you decide on, you can be assured that a business that continuous to deliver value stay in business.