When sales are increasing, and new opportunities can be sensed, many business owner’s thoughts turn to expansion, however expansion can be as dangerous to your business as no growth at all.
Unplanned rapid growth can destabilise a business giving its owners a false sense of wellbeing from growing sales whilst the cost of getting those additional sales eat up more funds than expected. If expansion is on your agenda, there are a few things to keep in mind.
The biggest danger in expansion is the erosion of profits through uncontrolled spending. Overhead expenses that were under control previously can grow rapidly with a bigger scale of operations – transport, inventory, rent on larger space, and all the rest will “chew up” precious cash.
While it might be expected that more sales will return the same profit margin, or even better since costs are spread across a greater number of sales, this is not automatically the case.
Additional sales can come with unexpected costs that can actually decrease your margins. Margin analysis will tell you if you are really growing or just running faster to stay in the same place (or go backwards).
With extra production needed it seems natural to hire more people but a sudden influx of new employees can introduce problems ranging from changing the dynamics in the old team, creating training and quality issues and increased insurance and employee costs.
Consider alternatives to simply employing people such as retraining existing employees to pick up new tasks, taking contractors or casuals; or maybe even outsourcing some of the work.
Balance your use of casuals against the training investment required and the skills you need to have on tap in the business; temporary people take their knowledge and skills with them when they leave!
Typically, most small business owners will seek a business loan to expand operations. If the expansion doesn’t go according to plan, then the business can very easily end up going backwards.
Look for low cost sources of funds from providers such as government small business agencies and have a detailed and realistic projection of income and outflows when making the request for funding.
Many advisors will say that “if a business is not growing, it is dying”: there is a lot of truth in that. Wise owners however are aware that growth at any cost will likely mean an early death – an eventuality not even contemplated when that big opportunity presented itself.By Graeme Fitzgerald