Expansion often means something different for every small business. Whether you’re looking to open a new location or add new products or services, it’s important to properly prepare to ensure your business grows successfully.
In this article, we outline five common expansion issues and what you can do to avoid them. These steps will help you optimize your business for expansion and will dramatically increase your chances of success.
Common Small Business Expansion Issues
1. Expanding for the wrong reasons.
Some businesses decide to expand when they’re not doing well financially, or as a reaction to changes in the market. Others attempt to grow top-line revenues without understanding the impact on their bottom line. While growth is critical for the future of the business, pursuing it without a sound and well-considered plan can lead to more harm than good.
Solution: Assess your motivations and goals. There are many reasons why growing your small business may be the right decision.Before rushing into expansion, it’s important to honestly evaluate your reasons for growth, and determine if they align with your long-term and short-term business goals. Consider bringing in a third-party consultant for an outside perspective on your expansion plans.
2. Growing your business before building a team.
Expansion requires a lot of hard work and commitment from all members of a team.For this reason, many small business owners choose to hire new staff to take on the increased workload. Oftentimes, business owners jumpstart the hiring process without fully evaluating what positions they need or considering the true costs of employment. This can lead to significant financial costs, as well as ineffective team members that are not prepared to meet the challenges of expansion.
Solution: Create a growth plan to help you evaluate your needs. Before starting the hiring process, take the time to assess your current team, consider the costs of hiring and determine what new roles will make the biggest impact on your business. One helpful tool is to create a growth plan to help you assess if your business is ready take on additional team members.
Ask for feedback from your accountant, your attorney or even your customers. They’re all great resources that can identify areas of concern and help you find additional ways to optimize opportunities.
3. Ignoring the full financial picture.
When creating expansion-based financial projections, business owners tend to focus on the assumptions behind growing revenue and gross profit margin. Expanding a business creates a whole new set of expenses and financial factors that need to be taken into consideration. If your financial projections fail to reflect the full range of additional expenses, the expected improvement in profit margins can be eroded significantly.
Solution: Look beyond revenue and gross profit when creating your financial projections. Your estimates for overhead and fixed costs should consider additional staff, equipment, space and the financing costs associated with any funds borrowed for the expansion. Review your projections for the full picture and determine whether or not this is the right time to expand your business.
4. Lacking a back-up plan.
As with most things in life, business expansions rarely play out exactly as planned. Sudden, unexpected expenses and challenges are common during expansions, and unfortunately can sink a business that’s not prepared with a contingency plan.
Solution: Identify several possible scenarios and create back-up plans for each. For your expansion plan, always run three scenarios: base-case (or baseline scenario), best case and worst case. Aim for the best case, but know what your contingency plan will be if your business runs into the worst-case scenario. This may include access to backup sources of cash, identifying assets that can be quickly liquidated or scaling back your growth plan.
5. Neglecting to research funding options.
One of the biggest issues that many business owners face when expanding is a lack of capital.If you don’t do your homework to identify the types and amount of funding you need and the best lending sources for them, you’re at risk of taking on high cost loans that can leave your business struggling financially.
Solution: Research funding options during your planning phase. There are many sources of funding that are available, and it’s important to find the option that best fits your needs and timeframe.
For example, expanding inventory should result in a relatively rapid return on your investment. In this case, quick access to short-term funding through a line of credit may be a good solution. For fixed assets like large equipment or real estate with longer-term returns on investment, you’ll want funding with longer terms and fixed rates to make monthly payments more manageable.
It’s also important to know that some lenders approve loans based only on historical performance, while others are willing to consider projections. This can make a significant difference in how much you can borrow and the terms you receive. Take the time to talk to a variety of lenders to learn more about what they require before you apply.
When you’re ready to grow your business, expand wisely
The best way to take advantage of expansion opportunities is to plan ahead. Knowing how to recognize when your business is ready for expansion, the right reasons for expansion, what it takes and how you’ll financially support expansion, will greatly increase your chances of success when you make the decision to expand.
EGF’s Business Advisors can help you with this, as well as provide funding options, business education and other support. To learn more, contact us today.