Key Takeaways:
- Expanding your company takes careful planning, research and consideration.
- Only expand when your company is properly financed and you are emotionally prepared.
- Expansion does not always mean more profits, but does bring more overhead.
A company that has achieved a limit to what they can manufacture, sell or service is not always in a position to expand. Before you expand your business, you must do a lot of research and consider everything possible. According to the Small Business Administration (SBA), taking risks to grow or expand your company is not always a good idea if that risk moves the company away from its core.
The core of your business is the fundamentals that built your company in the first place. This can be from the main products you produce to the main service you provide. You do not want to cause your main source of income to suffer just to spend your extra capital on growth. Because of this idea, you need to look for certain things before you plan on expanding your business.
Economies of scale must be able to handle the expansion. As your company increases sales, whether it be products or services, your unit costs fall. This means that your overall profit for each product will increase. You can only expand if these economies of scale can compensate for less profit and more cost. It will cost more per unit to compensate for the cost of expansion. If your profit margin is small, all of that profit will go into expansion.
You must do a thorough evaluation of what the expansion will cost to make sure the company can struggle through this lean time. Purchasing in larger quantities from your supplies will allow you to save more money, but this will not happen until after the expansion is complete. You also need to consider whether you can defend your business from any discounts your competitors are going to grant when they find out you are expanding.
Even though your initial costs per unit will increase to compensate for the expansion, the business will save money on administrative costs, advertising and purchasing because it will be spread over two or three stores or more departments.
You see competitors expanding. Research on how your market is performing is imperative. This will tell you whether the market is falling or increasing. Seeing a competitor starting to expand will give you a good idea of what is going on with the market. The sooner you can receive this information can benefit your own decision-making.
If your competitors are expanding, then it tells you that your competitors have found a niche you may have not discovered. You have two real choices when this occurs: your business can wait to see how your competitor performs or you can try to keep up with your competitor.
By waiting, you can see how your competitor's idea works out and whether there is a demand for their new product or service. By following your competitor's expansion, you will not have to offer the same product or service, but it can stimulate a similar idea. Watching and learning from your competitor's mistakes will only prevent you from spending a lot of money just to keep up with them.
Take a close look at your company's capital and cash flow. Expanding costs a lot of money. Your profits will decrease, your costs will increase and your customers will suffer. If you have the funds to finance the expansion yourself, then that is the best option. However, if you need to finance this expansion through a bank or venture capitalist, then you may have to take less of a role in the operation of the business you worked so hard to build.
The new venture must be profitable enough to pay your financing method back. You will place a priority on the expansion more than you will be paying attention to filling your customers needs, which can turn many customer off your product throughout your expansion period. This will decrease your regular revenue stream. Any major disaster can hinder your expansion and cost you more than you calculated.
Expansion also means that you will be taking less of a role in the day-to-day operations of your business. This occurs because you will need more people to manager and operate the additional products or services. You need to ask yourself whether your ego can handle releasing much of the control of the operations of your company.
However, adding new management can also benefit your operation because the infusion of new ideas. Never disregard the suggestions of workers, frontline supervisor sor managers. Your investor may have some inputs or ideas to help the expansion go more smoothly and be more profitable sooner.
Without taking a close look at these factors, you must never expand, or expand at a slower rate than you initially desired. Doing it correctly, patiently, with the proper research and planning each step competently, you will be able to grow your business and make more profits.
About the author:
Lewis Edward is one of the owners of TheOfficeProviders. He is a real estate investor with many interests in other sectors. Lewis researches and contributes various written features for TheOfficeProviders in areas regarding real estate, including office space for rent and serviced offices, and general business and economy matters. Lewis is experienced in the inner workings of both the traditional and flexible workspace industries and has developed close links with various figures in real estate circles, as well other circles.
