Some creative entrepreneurs enjoy the freelance life. They like working alone, and know that they are not cut out to manage others, or run a company. That doesn’t mean there aren’t important business aspects to managing a freelance practice—but committing to remaining a “company of one” does keep business matters to minimum. But if you have greater ambitions, if you would love to grow into a small firm, or even into a larger agency, then you need to be aware of the costs associated with scaling a creative practice.
Are you ready to take the struggle out of finding new clients?
In last week’s episode, we considered the basic motivations of any startup founder to go on Shark Tank. Namely, to find expert help, and capital to cover manufacturing costs in order to keep up with orders. We noted that product-based companies need capital upfront, but creative entrepreneurs need capital “in the form of time resources” after they’ve sold and collected payments for a project. This does make it easier for a creative entrepreneur to get started, but if you miscalculate your time and materials costs, you could end up in an even bigger bind than a product company that can’t fulfill orders. They can’t capture the money they need, but you may have already received, and possibly spent a good percentage of money already collected before you realize that you have a serious resource problem.
This common difficulty only increases with growth. And all the more if your growth happens rapidly. And so if you’re an ambitious creative entrepreneur, and you find yourself with more work than you can handle, you need to pay very careful attention to your costs, especially the step costs involved in scaling a creative practice.
We’ve considered step costs before, in episodes 22 and 55. But when you head down the path of scaling your creative practice the importance of calculating these costs is absolutely critical. In order to get a feel for the impact of step costs, especially early on in your growth, let’s think about them backwards. If you already had a company with 10 employees, and you add one more you would be increasing your overhead by about 10%. Worst case scenario, if you make a bad hire, your bottom line will take a 10% hit. But if you’ve been maintaining a minimum profit margin of 15-25% that will hurt, but it won’t crush you. But when you make your first hire you increase your overhead by 100%. The second hire carries a 50% increase, and the third a 33% hit. This disproportionate impact of early stage growth can be extremely hard to manage. Any disruption to business volume, or pressure from low profit margins, can truly crush an early stage creative startup.
But let’s suppose you make it through the gauntlet of those early hires and you get up to running an 8-12 person firm. When you grow from that level toward a 20 person firm you’ll experience yet another challenging step cost phenomenon. You see, the managerial practices of running a ten person firm change considerably on your way to 20. Somewhere in that growth stage you’re going to need new systems, processes, and a middle layer of management that you can do without when you’re managing a smaller team. And so the step cost scale notches up a level. You’ll have to add purely overhead staff members, which will require a new metric to your overall productivity and profits to sustain.
If you make it through that growth stage you’ll find that there are similar challenges moving past the 20-24 employee level on your way to becoming a much larger agency.
All these challenges can be overcome, but not if you don’t count the costs involved, and lay up the resources you’ll need to cover these painful transitional periods. Without that kind of forward looking planning you may easily find your growth thwarted by increased demands on capital, while draining the time resources of your entire team.
If you have ambitions to grow your creative practice, learn how to master step cost calculations. Build them into your hiring plans, and watch those first few steps, they can be a doozy.
Until next week: don’t let the business of creativity overwhelm your creative business.