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The Concept of Scalability

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To some the idea of scalability is not a new concept…particularly for those with a background in business. However, to other professionals, this might be a foreign concept so it’s important to talk about it in the context of entrepreneurship and even in investing.

If a business is considered “scalable”, it is something that has potential for growth well beyond its current state. The most lucrative businesses are scalable. If you work in exchange for time the way most professionals do, your job is not scalable. Although you may have substantial growth in your income over time, there is an upper limit of income that you may earn simply because you only have so many hours in the day to work.

As an employee, you may be working for a “scalable” business, but you will not benefit substantially from your employer’s increase in scale. For example, say you are an attorney who bills out $250/hour. If you are an employee of a business, you may get some kind of bonus at the end of the year for your productivity, but it is still based on your billable hours. If you own your own practice or are a partner, you may better see the fruits of your labor, but again, your income is based only on the revenue you produce in exchange for time.

Now, say you are an owner of a law firm that employs 3 attorneys. Each bills at $200/hour. The limit of your firm’s revenue is based on the total number of billable hours in the year by these three employees. So, let’s say that after paying the attorneys and other overhead, you as the business owner profit 300K per year. Since your income is not based on billable hours but rather your ability to manage your company, in theory your business would be scalable. That is, you could grow your company to 300 attorneys over time and, although your profit margin would decrease because of increased business infrastructure costs, you would probably make a substantially larger profit without necessarily working any more hours in the day.

Scalability is an important concept for people who are interested in entrepreneurial activity through buying or starting a business because it helps to define potential growth in a business. When there is significant potential growth in a business, there is significant potential profit.

Are you involved or potentially interested in investing or acquiring a business? Is it scalable?