Short Answer:

You’re scaling successfully if your firm is growing at roughly twice the rate of the market and you’re generating 3x to 5x more profit percentage than the average in your industry i.e. if the average call center generates 4% profit; your firm is generating 12% to 20%. I recognize that in high profit margin industries, this is impossible – so aim to be in the top 10% of profitability among your competitors even if growing rapidly.

Longer Answer:

Serial entrepreneur and tech incubator leader David Cummings has updated the classic Rule of 40. The Rule of 40 suggests your growth rate plus profit percentage should equal 40 or higher. He suggests a Rule of 50 where you get to multiply your growth rate by 2 and add your profit percentage i.e. a growth rate of 20%x2 plus a profit percentage of 10% gives you a score of 50. McKinsey’s research supports giving more weight to growth as well.

The other key metric is consistency in growth. What you’re seeking is scaling your firm’s valuation and greater weight is given to a firm with a steady growth in revenue and profits than one where both swing wildly from year to year.

Last, are your growth margin percentages increasing vs. decreasing. There is a tendency, once a firm approaches $10 million in revenue, for gross margins to slip by a few percentage points – due to the increasing complexity of the business. Successful scaling drives productivity improvements so gross margins increase a few percentage points over the rest of the industry. Adding four points vs. losing four points of margin generates a swing of $800,000 on $10 million in revenue – the cash you need to fund the proper scalable infrastructure and talent.

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