As a business owner you are always looking for ways to grow your business, and as you begin to increase sales and sense new opportunities it is not unusual for your thoughts to turn to expansion. But unplanned expansion can be as dangerous to your business as no growth at all.
Fast growth can destabilize a business giving its owners a false sense of security while the additional sales volumes can eat up more working capital than expected.
If you are aiming for business expansion, keep these things in mind.
Watch Your Overheads
The biggest danger in running a business expansion program is the loss of profit that comes from uncontrolled spending when you are just too busy to keep track of what is happening. Overhead expenses that were under control in the stable business situation can grow rapidly to cover the extra expenses associated with a bigger scale of operations – transport, inventory, rental on larger storage space, and all the rest will eat into your working capital levels if not watched closely.
Track Your Profit Margins
You would normally expect that you can increase sales volumes and achieve the same profit margin, or even better since overheads will be spread across a greater amount of sales income and because the cost of goods goes down as you buy in greater quantities But this is not always the case. Additional sales often come with unanticipated costs and reduced efficiencies that can actually decrease your margins. You need to regularly track your profit margins to see if you are really growing or just running faster to stay in the same place.
As you grow your business it seems natural to hire more people but a sudden influx of new employees can introduce problems ranging from changing the dynamics among the old team and creating morale problems to higher insurance and employee benefits costs. Consider alternatives such as retraining some of the existing employees to pick up new tasks, taking on freelancers and temps or maybe even outsourcing some of the work. Balance your use of temps against the training investment they require and the skills you will really need to have on tap in the business because these people will take their knowledge and skills with them when they leave.
Don’t Underestimate Cash Flow Requirements
A growing business is hungry for cash to fund higher debtor and inventory levels as well as increased overheads and capital investments. Typically, most small business owners will seek a business loan to expand operations. But the danger here is that if the expansion doesn’t go according to plan then the business can very easily end up in the red with a bad credit record. Look for the cheapest and most flexible source of funds from accredited providers and have a detailed and realistic projection of income and outflows to fully understand your need for funding.
Keep Customers Loyal
Good customer service is what drives your business success, but ironically it is also one of the first things that tends to be forgotten when businesses go into expansion mode. Employees get caught up in the ramping-up activities and lose track of what is happening with customers. So the very customer service that helped you grow your business in the first place becomes difficult to sustain and customer defection occurs. Securing new business through the growth phase can also be hard to factor in to activities. The key to retaining customers is to maintain adequate staffing levels that ensure current customers continue to receive the attention and service that has made you their supplier of choice.
Forecast Cash Flow
Sudden business expansion can involve a heavy investment to handle the production of new orders that won’t translate into cash in the bank for some time. In the meantime the business still has to pay its creditors. Poorly managed or inadequate cash flow is a major cause of expansion failure. Building a strong understanding of your cash flow needs when going into a period of rapid growth will make the process much less dangerous to the business’ survival.
Avoid Disagreement Among Owners
Multi-ownership can pose its own threats to the success of an expansionary drive. Ownership arrangements that have functioned effectively prior to expansion activity can become increasingly problematic. As business issues become more complex the views of different owners on such things as how to run the business and their vision of where it should be going may diverge and introduce a conflict at the very top level.
Particularly hard to deal with is the situation that arises when the expansion takes the management of operations beyond the competence of one of the owners so that they are no longer making an effective contribution. When this happens the departure of one or more partners may be necessary to establish a unified direction for the growing business.
To succeed, you must find a way to grow your business and you shouldn’t shy away from growing just because there are challenges involved. Businesses don’t fail because they grow. They fail because they don’t manage their growth or grow their managers. There’s no substitute for expanding according to a sound business plan.