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What’s The Perfect Size For A Successful Business?

By January 2023January 16th, 2023No Comments
What's the perfect size for a successful business - Beyond Accounting

Is your business the right size? That may seem like a strange question to ask, but I believe there is an ideal size for every business, and it all starts with your primary goals as the business owner. In this article, I explore the received wisdom that “scale is good” and show you that any size of business can bring you the income, work-life balance, and professional fulfilment you seek!

Some Irish business statistics

Ireland is a pretty good place to do business. Data from the Central Statistics Office (CSO) shows there are some 290,000 companies (of every size) in the country. In 2021, there were 25,695 new companies registered, however some 12,584 companies were either closed down or become insolvent. Failure rates are high in business, it’s said that half of all businesses don’t make it past year five.

Staying in business is, as you can see, a success in itself. But what of the chances of scaling? Ireland is overwhelmingly an island of SMEs – more than 99% of active enterprises are SMEs. According to Statista, of all Irish SMEs in 2021, a massive 92% were micro businesses (0-9 employees), 7% were small businesses (10-49 employees), and just 1% were medium-sized (50-249 employees).

So, what are the 25,000 or so businesses created every year hoping for? If they are in the tech industry, they may well be hoping to reach the status of unicorn (a company with a >$1 billion valuation). However, there are just a handful of Irish unicorns to date, making the chances of this happening on a par with winning the lottery.

It’s interesting to note the different attitude to startups in the US compared to Europe. In the US, starting up is not considered an achievement in and of itself. It’s widely accepted that most startups will fail and so they aren’t seen as having any potential at all until they have proven otherwise.

Here in Ireland, we put quite a gloss on the topic. There’s a reverence for entrepreneurs that they don’t have in the US, and we tend to put anyone who owns a business on the same level – whether it’s someone running a part-time side-hustle at the kitchen table or a business veteran running a multi-million-euro company.

Startup aspirations aside, there are many reasons to launch a business. As almost all businesses will stay at SME level, business owners have a choice: what kind of SME do you want to be? I think there are lots of instances where it is actually preferable to stay small and reap bigger rewards than you would get if you scaled. Here are some of the reasons why.

Scaling a company is no fairytale

Scaling isn’t universally a good thing. If you manage to land investment, it can feel like you’re now on the yellow brick road to growth and triumph. But VCs come with expectations and will want you to put their money to work so that they can see if the business has what it takes. That’s how they decide whether to invest more or move on to the next venture. The moment investment cash is in the bank, you’ll be putting together new teams (marketing, sales, development, etc.) and breaking into your next markets. Spend it ’till you make it… it’s exhilarating if that way of working suits you. However, the vast majority of startup don’t scale and can’t get their next round of funding.

If your bid to scale proves successful, you are now just one (fairly small) shareholder in the company. Even if you’re still the CEO, you’re now essentially just an employee and answerable to your board for your decisions and results. The pressure is enormous. The media does a good job of making startup life look glamorous, but it’s an incredibly tough job that only a few people are cut out for.

Staying small doesn’t mean your business isn’t worthwhile. Scaling isn’t obligatory, and plenty of businesses that scale end up overextended or out of cash. Hopefully the above statistics speak for themselves, there is no “right size” after all!

The media does a good job of making startup life look glamorous, but it’s an incredibly tough job that only a few people are cut out for.

Whether scaling your company or not, I believe you should avoid running a business that doesn’t make money. I’m glad the concept of scaling at a loss that was prevalent in the past couple of decades – where startups traded making money for gaining market share – is no longer the prevailing logic for the majority of startups. Startups should make money from day one, regardless of size.

It’s stressful to run a business that’s struggling all the time. When you consider the risks you are taking by being a business owner (unlike a regular salaried job, there are no benefits, pension, or job security unless you get up every morning and make sure they happen). So, profit should really be a priority, even if it isn’t your only goal. I look at this in more depth in my blog Why It’s Important That Your Business Makes A Profit.

Which shoe fits you?

At microbusiness level, there are typically two models we see.

The first is the one fee-earner business which, done right, could have a turnover of up to €300,000 per year and maybe €200,000 in profit. This kind of model works well and has the added benefit that there is almost no people management involved, and all the effort that would go into scaling can instead go to making the company really efficient and profitable.

Of course, you don’t have to be turning over €300,000 to get a healthy income. A sole proprietor business can function with very little overhead costs and be scaled to deliver any kind of work-life balance you want. You may want to live outside of Dublin and work just 15 hours a week, and if that’s the case there’s no reason you couldn’t bring in maybe €60,000 per year and be very happy with that.

The second model we see a lot is the company with a team of around 10 people and turnover of €1 million to €2 million. There are a few issues I’ve seen in companies this size.

Profitability

Typically, these companies tend to be making a more modest profit, with levels of around 10% or less. Given what goes into running a business this size, I feel that profit levels should be closer to 30% to make this worthwhile. If profitability is on the low side, there are two main areas that are usually keeping levels down:

  • Sales prices are too low – this could be down to confidence, not letting bad customers go, not pitching to the right market, etc.
  • Cost base is too high – this could be about making sure staff are delivering in proportion to what they cost, inefficient operations, big overheads, etc.

Unbillable staff

Issues can also arise because it’s not clear who is paying for the work of certain people in the business. I’ve seen companies with around 10 employees where the three most senior people are managing the business but not delivering billable work. All three people may be busy, but a company that size can’t have three people as overheads. In this situation, they would need to be delivering at least 50% billable time as well as contributing to running the business.

Where I’ve worked with a company to change this, the result has been a huge change in profitability, but no lasting negative effect felt on the day-to-day of the business. SMEs should take a really hard look at staff costs. A microbusiness can’t have people who are overhead only and in a €1 million turnover company I would say only one person (possible one and a half) should be a full-time manager or administrator and not need to produce revenue.

Finding your own balance

 “Growth is good” and “success is scale” have become received wisdom in the business world. But I think success is far more subjective and subtle than that. While it doesn’t make for the most thrilling feature in the Sunday papers, the idea of creating a highly profitable one-person company or small business with around 10 employees and a couple of million in turnover is much more achievable. These are real businesses that we see every day, and there are plenty of them in Ireland.

Some of the models I’ve described are what we would have called “lifestyle businesses” before. There was a tendency for finance types to think in terms of “lifestyle” businesses vs “real” businesses. Which got me thinking about freelancers, and how that was almost a derogatory term when I started out. There was a perception that freelancers worked for themselves because they couldn’t get a “real” job and, because they didn’t have employees, they weren’t running a “real” business.

But all this has changed a lot. Now, sole proprietor businesses, or freelancers, are seen to be small by choice, earning good money while embracing the freedom, flexibility, and control that their business structure offers. The line between a freelancer and a single person limited company is mainly a taxation and compliance one. I’m not sure that there’s really any practical difference from a day-to-day point of view.

What’s next for the agency model?

Another trend we’re seeing is a squeeze on the agency model. Lots of agencies use subcontractors as it minimises the risk of running a huge payroll, instead giving the flexibility to increase the team when needed and then reduce back to a core of permanent employees when workloads are lighter.

Nowadays, however, freelancers charge almost as much as agencies, so job profitability when there are a lot of freelancers on a team is much lower (in a service business, cost often follows the chargeable hours + overheads + profit ratio rule of thumb of 33/33/33; I looked at this in more detail in my blog How To Set Your Rates Or Pricing In A Service Business.)

So, freelancers are earning nearly as much as the agencies, but without having the overheads or staff to worry about. Given the other changes affecting the agency model in recent years, there’s a real need to establish a structure that works for you. Part of this will ensure having confidence in your business model and the value you bring, and also being able to set boundaries or conditions.

One trend I’ve started seeing is consultants having a minimum number of days they will charge for. This means they get to work on meatier projects, so resource planning is easier, and they tend to get better project outcomes simply because they’ve been able to put in the time to do something really well.

Is your business the right size?

So, back to my question at the top of this article. Is your business the right size?

If you have decided what success is for you, and if that’s realistic and you are able to achieve it, you have probably found the right size. It all comes down to whether your business is delivering for you rather than conforming to some imagined ideal. As we saw in my examples, an owner of a one-person business could be taking home as much as the owner of the €2 million business, without any of the added pressure and stress. 

If you have grown your business, but it isn’t bringing you the income you want, that is something you can and should address. If you’re still growing your business but mindful of maintaining your work-life balance while still earning enough to support yourself, remember that sometimes a smaller business can bring much higher profit levels. And if you decide to stay at exactly the same size for the next 20 years, that will make yours a statistic-defying successful company!

We help clients with financial health checks, business planning, and str. If you’d like to move to Beyond Accounting, get in contact today or call 01 639 2963. 
Rory