Business expansion – don’t let it run away from you

Business expansion requires very careful thought

Your business is doing really well and you’re thinking about business expansion.

Congratulations, this is an exciting time! But before you pull out all the stops, are you really ready?

Earning a steady income doesn’t necessarily mean it’s time to expand – first, you need to think about whether expansion will actually benefit you. Will you still make money – and will you still be happy? Here are some things to consider before taking the plunge.

Can you actually afford it?

The first of our business growth tips is hopefully quite an obvious one. You should look at your finances very carefully if you’re considering business expansion, taking time to analyse your sales, overheads and income.

You need to analyse them both as they are now and as they are likely to be in various scenarios – no expansion, successful expansion, or one that doesn’t go as well as you hoped. Make sure that you’re not just experiencing seasonal or temporary growth.

Now is a particularly good time to make sure your business is as efficient as it could be. You should make extra effort to be careful during times of growth, as you may be spending a lot of money and it’s easy to get carried away.

Business expansion – are you sure you really know what you’re getting into?

Many businesses diversify very successfully. It is, however, a risk and like all risks you should think about it carefully.

Do not assume that because you have done well at X, you will automatically also do well at Y. Y can be very similar to X while also being a whole different ball game.

Business people often underestimate the amount of time and money they will need to break into a new market and it can be difficult to foresee all the issues you might encounter in uncharted territory.

There will always be an element of uncertainty but it can be reduced. Research the market, your target customers, your new competitors and the marketing and distribution channels open to you.

Think about what resources you need – such as new equipment or new people.

You may need people with specific expertise in the area you’re expanding into, or you may need new managers. While we would generally say that most businesses could do with fewer managers, if your business increases dramatically in size, running it will involve a lot more work.

Not having sufficient management capacity can cause real problems for an expanding business, which can veer off course unexpectedly without a strong team in charge.

Business expansion isn’t always about new customers – there could be opportunities with those you already have. It’s usually much easier to find new business from current clients than to start afresh with untested ones. This is one of the many reasons why nurturing your customer relationships is one of the keys to a successful business.

Do your existing customers need something you can provide – maybe something they don’t even know they need?

How’s your cash flow?

Expansion will probably involve an investment of some sort, so you need to think about whether you have enough capital.

Sometimes businesses go bust as they expand, quite simply because the gap between making the necessary investment and being paid for the new products or services they offer is too long.

You may have to buy the raw materials and equipment you need to make a new line of goods several months before they’re finished, distributed, sold and paid for.

No matter how wildly successful that product is, if you don’t have enough capital to cover the initial investment plus all your running costs in the interim, then you’re snookered.

In a short-term situation like this, your bank should be able to help you out either through an overdraft, or something similar called revolving credit – where the bank simply allows you the credit you need (up to a certain amount) on an ongoing basis, in return for interest.

Another option which can help is factoring, or receivables financing – where, once you’ve sold your product and invoiced your customers, the bank advances you the money you’re owed. When your customers then pay you, the bank recoups its money. The bank takes a small cut as recompense, so you lose out slightly but it’s better than going bust.

Loans are more for longer term finance – if you need a loan, make sure you have a clear plan for how you’re going to use the money. Even if you’re not thinking about expanding right now, it’s always wise to keep in your bank manager’s good books, as if you want to borrow money to expand in the future, they will take your financial track record into account.

And finally …

Most importantly of all, even after you’ve considered all this, think about whether you really do want to expand, or whether you are looking to grow just for the sake of it.

Keep in mind why you went into business in the first place and what you’re good at.

If business expansion would divert you too much from that, then even if it would potentially make more money, it may not be right for your business – or for you personally.

A classic example here is the brilliant teacher who is promoted to head and no longer takes any classes, or the outstanding reporter who becomes an editor and barely gets to write any more.

Managing a large business and managing a team of people both require very specific skill sets – do you have them? Entrepreneurs, by definition, are often strong and unusual characters. They may not be the best people to manage large teams of people who may be quite different from them in their personalities and motivations.

But more important than that, is it even what you want to do? If you’re a master craftsman who loves the creative process and takes pride in being able to put love and care into everything you make, do you want to expand if it’s going to take you away from that?

A good accountant helps you balance your books – but it takes a great accountant to help you make a success of the next chapter. At THP Chartered Accountants, we’ve helped many SMEs grow successfully – at the right pace and in the way that’s right for them.

After all, expansion is something we have first-hand experience of ourselves – we have grown our business to four offices in Chelmsford, Sutton, Wanstead and Saffron Walden and provide accounting services to more and more companies across the south east. Call us on 020 8989 5147 to chat about how we can help.