Should You Expand Your Business? A Few Things to Consider Before Taking the Next Step
Janet Allon and the editors of Victoria Magazine, in their book “Turn Your Passion into Profits: How to Start the Business of Your Dreams” (New York: Hearst Books, 2001) suggests that entrepreneurs need to consider the following points before expanding there small business:
1. Are there economies of scale that will benefit an expanded operation?
Often times when your business increases in size, the cost per unit falls. This normally results in lower prices, higher profit – or both. You should only consider expanding your business is the economies of scale will allow you to sell your products or services for lower prices or if they allow you to make a profit per item sold.
“You may also be in a better position to defend your business against price-cutting by your competitors. As you branch out to other markets, you may be able to sell more and increase your sales. Larger sales volume will allow you to offset lower per-unit profit (powerhomebiz.com)”.
Expanding your business could also help you gain more resources; such improved premises, increased marketing resources, and added product features that provide more value for customers. Your costs-per-unit will come down, as the costs like advertising; purchasing and other functions are distributed evenly amongst all your products and locations
2. Are your competitors expanding?
Gathering useful information about your desired market should play a key part in your decision to expand your business. You could be able to gather important clues about the market, as well as some indication about your competitor’s situation. Getting information about your competitors can give you the leading edge, as it can show you ways in which your company can benefit the customer and become a unique asset to your businesses desired market.
If your competitors are making changes to their operations, it may mean that they have discovered new, opportunities in the market. If this is true, you can one of do two things: wait and see how the competitor does, or follow the competitor’s lead.
If you choose to wait for the results your competitor’s venture, you can determine for yourself whether demand really exists and if the benefits outweigh the risks. However if you decide to follow your competitor’s lead, that does not necessarily mean that you have to duplicate exactly what they are doing. Instead, you can use their ideas to come up with your own venture, or find ways to improve on your competitors ideas.
3. Can you finance the expansion internally?
Before deciding on whether or not to expand your business, you first need to study the financial benefits of such an expansion as well as whether your cash flow can support the additional investment. You will need to determine where and how you will get the money to pay for the additional inventory, new facilities or equipment. The idyllic situation would be to expand only when you have previously proven that demand for your product exists.
If you determine that you will need additional capital, whether it is a loan from the bank or an equity infusion, you must make sure that the new expansion will be lucrative enough to allow you to earn enough money to repay your loans and keep your business afloat. Often times small businesses fold early when they do not thoroughly plan their growth strategy, this eventually leads them to being buried deep in debt with no other option but than to file for Chapter 11 bankruptcy or liquidate assets. Like any other business decisions, expand only when you think you have financial benefits to gain
4. Will your customers tolerate your growing pains?
Timing is crucial in making the decision to expand a business. A downturn in the economy, a war, or any life-changing event can drastically reduce consumer demand for your product. If people are not spending the way that they used to, are you positive that your business will be able to survive the expenses generated from expanding your business. Unless you have unlimited funds that can support expansion even with reduced demand, make sure that the business environment can support your expansion
5. Are you willing to play a less hands-on role in an expanded operation?
Whether you are opening an additional store, combining your store with an e-commerce venture, or simply moving your store to a better location, you should expect a change in the role that you play. From a one-person business, you may begin to hire new personnel to cope with your new undertaking. If you are opening a second store, you may need someone to manage that store, as it will be impossible for you to be in two places at the same time. You may need to seek the help of additional personnel to help you run your web site while you take care of your physical store.
When you expand your business, you should be prepared to hand over responsibilities to others and you must be open to new ways of handling your businesses affairs. If you are used to working solo, you may now have a new hat to wear.
If you are seeking expansion capital from investors and other capitalists, you should know that there is a great chance that you may have to relinquish some or all control to your investors. Some investors will demand equity or a say-so in the day-to-day operation of your business. Some will even agree to fund you on the condition that a person they recommend will run the expanded venture.
Given the arrival of new people in your business, you should always be open to new ideas. Your new store manager may have some suggestions on how to improve your business. Your new set of investors may want to have inputs in the decision-making process. These new participants in the decision-making process may be very hard on you, particularly if you are one of the thousands of entrepreneurs who think that they know their business by heart and they (and only they) know the best way to run there business . Unfortunately, many entrepreneurs believe that they can run there business had better than anyone can.
6. By expanding, are you diluting beyond recognition the passion that originally started the business?
Expansions that carry you far away from your original vision or passion may make you wealthy, but they will not bring you happiness. If you are a creative person, chances are that the business of taking care of business will take you away from some of the creative work. Growth may force you to let go of the total design control you enjoyed when the company was much smaller, and that may not be an easy adjustment.
