Short on cash and long on energy, most new business start-ups struggle through their first few months on the flexibility and stick-to-itiveness of their founder. Like feeling around for the light switch in the dark, you try to find a formula that works.
All of that experimentation usually gets you through the first few months but also creates a business highly dependent on your intuition. If you are feeling your way around, it is hard to train employees and therefore difficult to scale a business into anything more than a glorified job.
Instead of thrashing around in the first few months, follow this formula for starting a business that can grow beyond just you:
Step 1: Pick a product or service that has the potential to scale
Scalable products meet three criteria:
- They are teachable to your future employees (or you can program technology to deliver)
- They are valuable to your potential customers and
- They are repeatable meaning customers have to come back to re-purchase often
Jim Hindman recognized that the typical auto mechanic — reliant on the owner as master mechanic — lacked scalability which is why he picked oil changes as the service to build Jiffy Lube around. Hindman reasoned that he could teach a sixteen your old high school student to change oil, and customers would come back every three months to prolong the life of their car. Hindman sold Jiffy Lube to Penzoil for $43 million.
Step 2: Turn your company into a cash-spitting bank machine
Once you have isolated a product/service that customers value and need to come back for, start charging up front. Think it’s impossible? Remember you are only selling what your customers will find most valuable and need on a regular basis (step 1). If you avoid commoditization, you get to set the terms and charging up front allows you to use your customer’s cash to finance your growth instead of going to a bank or sharing equity.
Michael Dell used to inventory computer parts and wait for the phone to ring. As a result, his company sucked up gobs of cash and almost choked on its own growth. Dell turned his cash flow cycle on its head and started charging customers first and then ordering the inventory on 60-day terms. As a result, he was able to use his customer’s cash to finance his growth in the early days.
Step 3: Start saying “No”
Once you have some cash coming in, start saying NO to anyone asking you for customization. Focus on the product or service that you identified in Step 1. Being a specialist at one thing will make you more referable and preserve your cash and resources.
For example, The School Photograph Company based in Danbury England only does school photos. Schools hire them each year to take the annual classroom shots (repeatable), they hire young photographers happy for the portfolio-building professional experience (teachable) and headmasters hire them because they are the best company in England for getting a group of squirming kids to sit, smile and get back to class in minutes. They don’t do wedding photos. You can’t get The School Photography Company to shoot your son’s t-ball team. Their specialization makes them referable and ultimately an acquisition target.
Follow these three steps and you’ll be on your way to creating more than just a jobyou’ll have a business you could sell one day.More in: Small Business Growth