Growing your business can seem daunting. With good research and planning, you can put the process into perspective. Here we take you through the main financial considerations of business expansion.
Weigh up your decision
Expanding your business is a difficult decision, and some business owners might feel daunted by the idea of growing their business. There are risks involved, but if you’ve thought it through carefully, you can minimise those risks. And remember, there are many benefits and opportunities you may be able to capitalise on through expansion.
For instance, being a larger business helps in negotiations, such as with your suppliers. If you’re placing larger bulk orders, you’ll be in a stronger negotiating position. It can also mean easier lead generation, since you’ll be boosting brand awareness.
What exactly are you aiming for?
For your plan to be workable, it’s important to have a very clear idea of what you’re hoping to achieve and on what timescale. Be hard on yourself here – what’s your rationale for choosing these particular goals? Is there a more logical route to take?
Once you've settled on a firm strategy, make your progress more achievable by:
Your expansion plans should take into account the economies of scale relevant to your situation – sweet spots in output where profit becomes optimal. Crucially, they should also consider the limits of these economies of scale. For instance, are you limited by how many raw materials you can source locally?
With one warehouse and 20 staff, you may be producing 1,000 units a month. However, you may be able to produce 1,500 units with the same infrastructure. Variable costs will increase but fixed costs will stay constant, which is key to improving your profit margins.. However, expanding to a second warehouse, with 10 more staff, will dent your profit margin until you can catch up.
The trick is to understand and exploit economies of scale where possible, without being blindly tied to the appeal of them – after all, there’s no point manufacturing 1,500 units if there isn’t the demand for them. It’s just one part of the overall picture.
Budget for growth
Depending on the scale of your expansion, both your fixed and variable costs are both likely to be higher. Make sure you’re getting the balance right – will you definitely be able to cover these higher costs?
Forecasting your cash flow for expansion is a crucial exercise. Analyse your variable and fixed costs in detail by making sure your forecast includes not only the projected costs for your growth project, but the day-to-day running of your business pre- and post-expansion.
Aim to cover any large expenses incurred while expanding – for instance, through purchasing new equipment. You also need to know that once you’ve got the nuts and bolts in place, your new, larger business will be able to stay in the black day-to-day. This will probably involve forecasting further ahead than you usually do.
Forecasting will help to highlight any potential areas of risk or hidden problems. In addition, if you’re not quite sure about some details of your strategy, running scenarios through your forecasts will help to hone the pace and scope of your plan.
Run a pessimistic, realistic and optimistic version of your final plan’s financial forecast. This will help avoid the temptation to be overly optimistic, and demonstrates to potential lenders and investors how carefully you’re thinking about the implications of growing your business.
Get your accountant to confirm that what you’ve planned is realistic. Try also to consult experts in the field and business owners with experience of growth – their advice may well help you draw up a more realistic expansion plan and avoid some hidden pitfalls.
How will you finance your expansion?
Depending on the type of business and scale of planned growth, bootstrapping – using your own operating revenue – may cover it. This allows for the owner to proceed with no external interference from lenders, but does expose the business to financial risk. As the funds for expansion won’t come in one large injection, it also places limits on the pace at which the business can grow.
In terms of external financing, the most obvious option is to discuss plans with your bank and try to secure a loan. If you welcome the idea of having additional skills and experience on hand, you may want to see if you can attract investors as another option.
Some owners launch their business on the stock market to raise capital for expansion. This may raise the profile of the business, and means handing over control to investors is avoided. However, it can be an expensive process and opens the business up to disclosure requirements. Needless to say, there are pros and cons to every type of financing, so make sure you do your homework.
As in all areas of business, planning and budgeting for expansion requires careful thought and time. Rushing into a growth project that hasn’t been subjected to due diligence is one of the quickest ways to fail.
No matter what your financing plan, it makes sense to invest time in optimising your cash flow in the lead up to expansion – you’ll need as much cash on hand as possible for any unforeseen issues. If you feel there’s room to improve in this area, use your expansion as a motivator to really tighten up your credit control and spending.
This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.