When I started Arment Dietrich, I thought the key to success was big revenue and lots of employees.
By 2007, we had 33 employees and $1,456,000 in revenue.
Even if you do quick math and divided the revenue by the number of employees, you can quickly tell how seemingly not profitable we were.
For each employee, that’s only $44,000 in revenue…not enough to cover most of their salaries.
Or mine, for that matter.
But I had no idea.
I didn’t know anything about a P&L statement, what the balance sheet meant, or how much revenue we should have per employee to be profitable.
So I kept borrowing money to hire more people, in the hopes that an experienced team would be able to help us grow quickly enough to pay the money back.
It turns out I was wrong.
Very, very wrong.
And it was a very hard—and expensive—lesson in how to run the financial side of a business.
Perception Is Not Always Reality
It’s hard though, you know?
When someone asks you about your business, one of the first questions they ask is how many employees you have.
If you say, “We have four employees,” they assume you’re not successful.
Of course, it’s rude to ask how much money you make—top or bottom line.
But, let’s say your four employees bill out an average of $250,000 each.
And let’s say your payroll is $300,000 a year.
That’s $1,000,000 in revenue and $300,000 in costs, which leaves you with $700,000 in gross profit.
When you compare that to the 2007 numbers I described above, by all appearances that year would have been much more successful.
But we were $430,000 in the red that year.
Not successful at all.
People put too much credence on those things, and not on actually, I don’t know, making money.
Growing vs. Scaling a Business
They also put too much credence on growth versus scaling a business.
Growth means you are adding resources at the same rate that you’re adding revenue.
Scaling means you are adding revenue at a much greater rate than cost.
In 2007, we were focused on growth (just top-line growth, apparently) and were adding people to help us get there.
At the same time, we had no process and I was on the road 24/7 doing new business and trying to keep up with the rising payroll.
This is very indicative in a professional services business, such as a PR firm.
We gain a new client and we hire people to service said client, so we are adding revenue at the same rate that we are adding costs.
Look at HubSpot
On the flip side, you have great examples of companies that have figured out scaling, such as software as a service.
Look at how quickly HubSpot grew and went public.
Sure, they had to add people to service some of the business, but not at the same rate as a professional services firm.
When they reported 2015 earnings in February of this year, they were $182MM in revenue.
If they were a PR firm, they’d have to have—at minimum—1,400 employees to service all of that business.
They are said to have between 450 and 500 employees…a third of what a PR firm would need, therefore far, far more profitable.
They have learned the difference between scaling and growth.
This is why I love the idea of productizing what we do: It’s much, much easier to scale that way.
We don’t have to have more people for incremental sales.
Products vs. Services
Let’s say we want to add $200,000 of revenue in fourth quarter of this year.
If we were to do it the traditional way, we’d have to go out and find a prospect who has about an $800,000 PR budget.
Then we’d have to pitch said prospect and spend a good amount of time (likely more than the 60 days we have left in third quarter) to close the business and get them started.
Then we’d have to make sure we were paid upfront—to the tune of $66,000 each month…and that they continued to pay us ahead of time through the end of the year.
Then we’d have to hire at least five new people and get them up-to-speed very quickly, both on the client and on our processes and culture.
This all sounds like a recipe for disaster, not to mention something we have about zero control over making happen.
If we were to create a product that sold for $1,000 and 200 people bought it?
We have $200,000 in revenue for fourth quarter without adding five new people, disrupting a well-oiled machine, or hoping and praying we can find a total of $800,000 in new business by October 1.
One of the very best books to read to help you think through all of this is Built to Sell.
Read it, study it, take lots of notes, plan, and get to work on scaling your business for 2017.