Is your business scalable? Here's how to put it to the test

Entrepreneurs decide to start their own businesses for many reasons. Control, freedom and income potential are at the top for many individuals. However, some business owners have visions of running multibillion-dollar ventures, while others only want a way to earn a decent living while their kids are at school.

The difference between the two business models comes down to running a scalable business versus running a lifestyle business. It's the difference between running a global advertising agency and being a solo copywriter, or owning a chain of auto repair facilities and managing a lone shop open only on weekends. One can grow exponentially while the other's growth is limited but still potentially very profitable.

There's no right or wrong answer. It all comes down to what's right for you and your dreams and goals.

Whether your business is scalable, or whether it can grow exponentially without a huge infusion of resources, comes down to a number of factors, says Judge Graham, author of Scale with Speed.

First, Graham says, you need to be sure that your business is either solving a problem for a market or helping that market create revenue. Your company needs to do one or the other very well for it to be a profitable business.

But is your business scalable? You need to meet the following five conditions if your goal is to run a scalable venture, Graham says:

1. Find a market niche

Being a specialist, where you serve a subset of a larger market, is the ticket to building a scalable business. Graham offers the example of running an insurance agency.

Rather than selling a wide range of insurance products, a better decision is to serve only motorcycle riders. That way you can develop a reputation among motorcycle owners as the go-to insurance provider and capture a large percentage of market share.

2. Plan for an exit 

From the beginning, it's important to think about selling your company. If the business is based solely on your expertise and your skills, it will have no value beyond your involvement. That's a lifestyle business, which can't really be sold.

A scalable business has value on its own, separate from the owner.

And, according to Graham, “The more niche you are, the better the odds someone will want to buy a specialist." That is, it's more likely a larger, complementary business may want to acquire yours.

3. Build in recurring revenue 

“You can't scale without recurring revenue," Graham says. Recurring revenue is income your business earns on a regular basis, without having to constantly be selling. Examples are fees for website hosting, subscription services or membership fees, such as for a fitness facility or club. Recurring revenue is a way to exponentially increase revenue without having to proportionally increase operating costs.

4. Be customer-centric

Companies that are zealous about serving their customers typically have long-term relationships with them. That means a high customer lifetime value. That's important for scaling. “If you have a customer attrition problem, you'll never scale," Graham says. “You have to serve the customers you have in order not to lose them." Steadily building your customer base is key to scaling.

5. Develop a plan 

To be scalable, you need to have a business plan that every member of your team is familiar with. You also need to break down annual goals into ever-smaller pieces, from annual to quarterly to monthly, then weekly and daily goals, so that employees are clear about what they need to do every day to hit the company's larger targets, Graham says. Without a plan, everyone's efforts will be diluted. It's harder to keep your whole team on course.

To run a profitable business, you need to be good at what you do and take care of customers. But to run a scalable business, you need to build a company that has a steady stream of revenue from satisfied customers that continually increases without having to add more staff.