[00:00:00] I hear a lot of people tell me that when they hear others talking about how they're scaling their business or scaling their revenue, it gives them the ick and look, I get it. You need to understand whether you are scaling your business or whether you are growing your business so that you understand what you are actually trying to do and how you are going to do it. Let me know, are you scaling your business? Are you trying to grow your business?
Intro
If we want to be able to tip the scales towards the favor of marginalized people, we need to understand the secrets to making money in small business. The more we talk about money and the secrets that usually stay at the golf club, the more likely we are to be able to make money.
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Acknowledgement of Country
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What is the difference between scaling your business and growing your business, and why should we care? My name's Fee Johnston. I'm a chartered accountant, money coach, business strategist, and the host. I'm the Money Secrets podcast. Thank you so much for being here. This is a topic that I hear talked about a lot in the kind of internet zeitgeist.
You hear people talking about how they're scaling their business and they're doing this, that or the other. We talk about passive income, [00:02:00] and it's a bit of a trigger word for me because there is no such thing as passive income, but let's unpack that as well. We don't actually hear people talking about how they're growing their income as much, and you might be thinking fee.
Why the hell does it matter whether I'm calling it scaling or growing? It actually makes a really big difference because you need to understand whether you are scaling your business or whether you are growing your business so that you understand what you are actually trying to do and how you are going to do it.
Let's start with scaling. So what is scaling? Look, I hear a lot of people tell me that when they hear others talking about how they're scaling their business or scaling their revenue, it gives them the ick. And look, I get it because a lot of very, uh, slick and slimy people on the internet are often talking about how they can help you scale your [00:03:00] business.
So let's talk about what scaling is. So scaling your revenue. Is where your business is able to increase income without also increasing costs. It's also what's being referred to in the term economies of scale, which means when the costs of business start to get less as a proportion of your income as you scale.
So let's get a little bit more technical. Scaling happens when your income isn't capped by your resources. Such as product availability, human resources, space time, et cetera. And the costs don't increase when income does. So one example of scalable income is online courses and downloadables. So yes, you have to put in the upfront work to build the course, to build the downloadables, and more importantly, to build the audience.
Whether you earn [00:04:00] $1,000 or a hundred thousand dollars from that course or downloadable, your costs and your time investment are roughly the same, and the number of spots available or the number of products available to sell isn't capped because there is no cap on an online course or downloadable.
Hopefully I'm unpacking this in a way that makes sense. So scaling is when your business is able to increase income. Without also increasing costs. So one of the really attractive traits of a tech business is that they are theoretically very scalable. So once the tech is perfected and distributed income is very scalable, actually the reality is often quite different from that though.
And some of you'll remember that I've interviewed two of the co-founders of Rounded, which is an Australian made. Invoicing and bookkeeping app. And what they will tell you is that there is a huge [00:05:00] amount of time and costs that go into building a tech business, and often it takes a long time before the costs don't increase with the income.
In other words, before the business is scalable. So if you think about a typical tech company. They might spend anywhere between one and five or one and 10 years building the product, building the audience, spending a lot of money. Often they'll be spending more than they're bringing in, and this is their investment into growing the asset that is the tech that they then sell.
Once that initial tech or that investment is done, often what you'll, what they'll find is that the income that they're then able to earn, especially if it's on subscription or even any other kind of recurring income stream, when a tech company is on a subscription and you've got customers bringing in income, it's actually not costing much more to bring on [00:06:00] another customer.
So yes, if you wanna get into the real nitty gritty of it, every customer that we bring on, whether we're a tech company or an accountant, does have a cost in either time or dollars. But the cost is minimal for each additional customer that you bring on when you have scalable income. So another example of scaling is where you have a product business.
Maybe it's an e-commerce business, maybe it's not. You have fixed costs, which might be things like rent and other operating costs, they don't increase as your income grows. So if you are a product business that is scaling, what you'll find is that the only additional cost for your business, for each additional sale that you make is the product cost.
So what happens is you might find that. [00:07:00] If your revenue is $500,000 and your operating expenses are 200,000, you might find that if you scale your revenue to a million dollars, your operating expenses might only increase slightly. That's how you know that your business is scaling. When you can see that income is growing and there are not additional costs that are being incurred.
In order to grow that revenue beyond the delivery of the product. Hopefully, I'm making sense. This would be easier if I was doing this on a video, but I hope you are understanding that scaling is where your income grows exponentially and your costs do not increase at the same rate. That is where businesses start to get huge profit margins because once those initial costs are covered.
Every single dollar of income beyond that [00:08:00] becomes almost 100% profitable. If it's a technology platform or it's a downloadable or an online course, that doesn't require any sort of maintenance or time to be put in to service that client. Yeah, so that's, that's what scaling is. Now, let's talk about what growth is.
So business growth is when your business income increases and your business expenses will also increase. Now, we don't talk about growing a business with as much excitement as scaling a business because a lot of people think that every business on the planet can be scaled. It's simply not true. So. The financial goal of business is to ensure that your costs don't increase more than your income.
And funnily enough, you would probably be surprised at how often that happens. So what happens is [00:09:00] founders are so excited by the growth that they're seeing and they start to get a little loose with the purse strings. So this overspending on expenses while in the growth phase is a huge cause of business failure.
You might hear sometimes in the zeitgeist that poor cash flow is one of the biggest reasons why small businesses close. And what's happening is it's before the hockey stick moment. So some of you may have heard of the hockey stick, which is what we're expressing when we're talking about scaling. So when your business income is growing and you are not.
Managing the growth of your expense as well. You might find that you temporarily dip into a point where your expenses are more than your income. That's going to lead to cashflow problems either now or in the future. Sometimes also, our income is higher than [00:10:00] our expenses, but our income is coming in slower than our expenses are going out.
This is what happens with cashflow problems. There's very few businesses where the income comes before the expenses. So when you have to pay for things like wages, product overheads, rent, you pay all of those things before the income that those assets and people generate comes through. You end up in this position where even though you are profitable, your cashflow is negative, and sometimes we can manage that for a short time.
If we don't get on top of that quickly, our business is at risk of.
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So let's go back to the concept of business growth. So growth is when your business income increases, and in most businesses, this will also mean that your business expenses will increase too. So what's really important to realize is that you can grow and you can grow profitably. It's important to understand whether you are trying to grow or whether you are trying to scale.
Because that's gonna give you much more information about what you should be investing your money in and what kind of results you should be expecting to see. So the typical type of business that will grow as opposed to scale would be an agency. So let's talk about a market marketing agency generally in any kind of [00:12:00] marketing agency, whether that's website development, social media, video production, copywriting, content creation.
Any of those business types that have a service as their product, essentially you pay your team and your team does work for your clients and you charge your clients for that. So every bit of income that you earn from the services that you deliver has a cost associated, which is your staff's time.
There's also other costs like overheads, rent subscriptions, those sorts of things. And what we're trying to do as founders of service providers is we're trying to make sure that the amount of income we are charging for the time that our team are working is more than the cost of their wages, plus the other expenses for the business.
So what I see a lot of agencies doing is they're trying to scale in inverted commas. [00:13:00] Scaling is not possible in a business where you have an expense or a cost for every bit of income that you earn. And what it means is that you'll be chasing after this elusive high profit margin work when actually it is hard to get a very high profit margin from a business where you are providing a service.
But having said that, you can have a hybrid income. Mix in a service based agency style business and this, this refers to anything from a dentist, to an accountant, to a marketing agency, any business where you are selling time, whether that's in charge by the hour, or you know, with packaging or value pricing doesn't make any difference.
You are selling a service and that comes with a cost. When you are able to add scalable revenue streams within your service based business, that's where you might start [00:14:00] seeing your profits start to grow quite rapidly. So what does that mean? It might mean that you start incorporating some one to many offers.
That might be a downloadable a course, it could be a group program, anything where you are reducing the amount of time that you are paying for. That's required to deliver that particular product or service. It might also mean that you start earning income from other sources that don't require time. That could be from affiliate marketing, it could be from referrals.
It could be from selling or licensing your ip. So if you have developed an incredible process or system, you might be able to leverage that income. By licensing it to other businesses to use. So you can see how even in a business that's not typically scalable, you can have scalable or leverageable means the same thing, income [00:15:00] streams within that mix.
So let's just get really clear about the difference between scaling and growing. Scaling a business is where the income of your business. Could grow to any number and your costs would not be growing at the same rate. That would usually be a tech company or an online education business, or a business that sells products or resources that do not have a cost per item.
Some e-commerce businesses can theoretically scale. Although they will have overheads that come with that growth, it's just that it won't come with every single dollar that they sell. So scalable is where you are growing your income and your expenses are not growing. Therefore, you can become very profitable once you reach an economy of scale.
And the second, [00:16:00] uh, type of revenue that we're talking about is growth. So when you are growing a business. You are growing your income, but every bit of income that you earn does come with a cost. That is a very great way of growing a business, but it means that your profit margin is unlikely to increase rapidly.
It will change from year to year based on your pricing and how efficient your team is, how strong your brand is, and you know many other factors. But you are unlikely to see profit margins beyond, I don't know, 10 to 25% of your income in a normal growing business. Whereas a scalable business may be able to reach a profit margin of 50% or more because there are not costs that come with every dollar of income.
And also to add that businesses that are unable to scale in the traditional sense. [00:17:00] May be able to add scalable or leveraged resources and revenue streams into their business, which will help to earn income without having an extra cost. That is the sort of thing, like building group programs, maybe running events if they're profitable.
It might be licensing your ip. It could be earning income from affiliate revenue or referrals. Those sorts of income streams that don't have an additional cost may mean that you can start to grow your profit margin beyond that kind of 10 to 25% range that you would see in a traditional manufacturing or service-based business.
I really hope that was helpful. Please send me some questions. This is a little bit of a tricky topic and I hope I did it justice in this podcast episode. Let me know, are you scaling your business? Are you trying to grow your business? Has this episode given you any [00:18:00] different ideas about. Revenue streams that you might go after or has it made you rethink what you are trying to achieve with the profitability of your business?
You can reach me anytime at, uh, peach Business on Instagram. I'm really friendly and you can send me a DM anytime and I'd love to hear any questions that you have about scaling or growing your revenue, and I shall see you next week.
Outro
Thank you so much for listening right up to the end. I hope you enjoyed this episode of Money Secrets, where we talk about the money secrets of successful small business owners. If you enjoyed the episode, I'd love it if you subscribe to the podcast, but leave us a review or share this episode with one of your friends. I hope you learned something. I hope you got a new perspective and I really hope you enjoyed the listening [00:19:00] experience.
