- 16th April 2018
- Posted by: Manolis
The business world, sometimes contradictorily, seems obsessed with size: Is less really more, or is more more? Is it worth it to consider expansion? How will you know when?
These can be confusing guidelines for entrepreneurs. Back in the early 2000s, I was growing my creative agency, Cimaglia Productions, believing that sheer size mattered most, that a greater amount of clients meant a greater amount of profit, and that exponentially rising overhead costs were simply a part of that reality.
It took me more than a decade to realize that this obsession with business growth wasn’t actually yielding me more personal income, nor was it representing higher profits for my company — or, in fact, making me any happier.
In other words, growth didn’t matter. Operating leverage did.
Your business’s operating leverage is determined by how your income fluctuates depending on your rate of sales. You might find, as I did, that increasing your annual sales after a certain point doesn’t actually generate more income or it generates income disproportionately lower than it does overhead. That means you might simply be generating work for work’s sake, increasing your need to add support and infrastructure, such as more staff or a bigger office — all necessary steps I took at Cimaglia Productions.
Exercise makes for a good analogy. If you walk into an OrangeTheory fitness center, you’ll find its mandate focuses less on pushing your body to its absolute limits than maintaining your heart rate in a precise range to maximize your results. Work out at your resting heart rate — around 80 beats per minute — and your metabolic efficiency will be at its lowest. But, regardless of whether you start amping up your workout to 160 or 200 beats per minute, you’ll burn the same number of calories per exercise. (You’ll burn them faster, sure, but you’ll also get tired faster and end up with the same result.) There’s an optimal workout range where you’re
exercising intensely for the most efficient amount of energy — and it’s different for every person.
A company’s profits tend to work on a bell curve. When you first start growing your company, if you’re doing things right, you should earn more money and grow your reputation. You might add a few salespeople to sell more product or invest in new equipment to pitch for bigger clients. This is a typical growth period for entrepreneurs, and your instinct will tell you that you should keep building.
But, in reality, after a few years of this growth, you might stop and take stock, as I did, of what all this actually means. At a certain point in the bell curve, your profits start to grow at a rate far outpaced by your company overhead. Your profits will likely hit a plateau. You might be running a $10-million dollar company that’s netting the same as a more tightly run company worth $5 million.
Make data points your focal points.
There are a few steps to take if you think your business growth has outpaced your profits. The first is to look at your data.
In my case, I only noticed the plateau after analyzing over a decade of Cimaglia Productions’ consistent growth. There were telltale signs that things were off — some of my contractors were earning almost as much as I was, but working a fraction of the hours. The absolute costs of running my business had become paramount, but when I looked at how much more business we were bringing in, the numbers were shocking.
I analyzed my month-to-month profits and visualized the numbers in a way I’d never seen them before. I looked at how much I was paying my contractors — people I’d hired specifically to work on new, big-name clients — and found that their incomes and my office infrastructure totalled a number far greater than I realized. I knew I needed to make fundamental changes to the way things were going if I wanted to keep my sanity and still run a successful business.
The solution: Have a goal in mind.
They say if you want to walk away from a casino a winner, you have to go with a goal in mind. Say to yourself, “I’ll leave when I have an extra $50 in my pocket,” and commit to that. If you keep playing, you’ll eventually start losing money, and could end up with nothing.
I’ve found having a target goal likewise helps in business. You can reverse engineer this number, as I did: When I discovered my business bell curve had already begun its decline, I analyzed which clients were requiring a disproportionately high amount of overhead and which infrastructural elements I could do without. I began turning down new clients, tightening my business until we got back to our own sweet spot.
It wasn’t easy, of course, nor would it be for you. Wanting to strip down a business that’s gotten too big — especially when it’s still visibly successful — is, at best, an awkward situation to be in. You’ll have to fire good employees and have difficult conversations. But, that’s part of doing business. Ultimately, the numbers should tell your story.
How will you know your optimal operating leverage?
There’s no easy answer to this. The quickest sign: You’ll start losing net profit. You can only really tell this by analyzing your profit margins on a monthly basis and noting the trend.
A common complaint I’ve heard from several business owners is about how much they’re hiring. If you’re hiring more contractors or staff specifically to work on a new major project, you could well be on the path to a lower operating leverage.
This advice won’t apply to every company, of course. There are CEOs in the tech sector — heads of the Ubers and Snapchats of the world — who would roll their eyes at the idea of minimizing a company with global ambitions.
If you sincerely believe you can steer that ship, all the power to you. But, for me, working in a creative industry, working 80-hour weeks meant less time doing what I loved. Now, after having revamped my company into a tighter boutique agency, I’m working more efficiently for my preferred clients, and with half the stress. Just like in exercise, sometimes working at twice the speed just isn’t worth it.