The increased costs involved in scaling up mean that the break even point will increase.
Check out the very simple cash flow projection which demonstrates a common problem with ambitious scaling up – over trading.
While sales and profit may be rising in a spectacular way the cash is draining out of the business.
Have we achieved break even in the start-up phase?
What extra sales are needed to achieve break even in the scale up phase and what is the timescale for achieving this?
Scaling up without knowing these basic financial facts increases the risk because there are no clear objectives and targets.
What are the cash flow implications of the scale up plan?
This should demonstrate the importance of understanding and managing the key numbers and ratios.
Giving our customers 60 days credit when our suppliers want paying in 30 days can be a recipe for disaster. Managing stock levels can also be crucial.
This example applies to any trading model.
Services and tech businesses can have the same problems around contract terms for payments versus the costs of supporting the sales.