The do’s and don'ts of business expansion
Provided by Business Partners Ltd, South Africa's leading investor in SMEs
At one time or another, every business goes through a growth spurt and, whether it’s a multi-national corporation or an entrepreneurial enterprise, expansion is a tough process to navigate.
The real danger for any expanding business is that it does so too quickly or in an uncontrolled way. When this happens, cash flow and customer satisfaction are usually the first casualties and, in extreme circumstances, these can result in the demise of a once flourishing business. The trick is therefore to manage the growth process so you reap the benefits in the medium- and long-term.
Are there any rules to follow when facing a business expansion? Naturally, every business has its own challenges, so one can’t really set a generic set of rules for expansion. There are however, important things to bear in mind and some pitfalls to avoid so that everything goes smoothly.
Plan your expansion
It may seem obvious that any entrepreneur going through an expansion phase should do so with a game-plan, but many businesses expand in reaction to circumstances and don’t draw up a solid plan. Without this roadmap, it’s easy to get lost along the way, making changes to your business that are either too costly or not well thought out.
During the planning phase, ask yourself:
- What is the real demand for your products or services right now?
- What is the projected demand for them over the next two to five years?
- How big do you need to grow in order to meet that demand?
- How will changing competitor activity affect your business over the next two to five years?
- What should your excess capacity for unusual demands be?
- How many additional staff will be needed and when should they best be employed?
- What's the best way phase in the expansion so cash flow isn’t compromised?
- Where can you achieve economies of scale? In other words where will expanding capacity reduce the cost of sales?
While planned expansion can take a business to a whole new level, over-expansion is one of the biggest dangers of a growth phase. It’s easy to get carried away in the heat of the moment and to expand beyond the needs and the financial capacity of the business.
As a rule of thumb, plan capacity based on a five-year projection of demand and allow an additional 10% of capacity over and above that for periods of heavy demand or for partial down-time in any part of your business. More than this could be very risky and leave a business with overheads it can’t cope with.
Remember, a business may go through several periods of expansion and it’s best to phase these according to demand. Don’t try to account for any and every eventuality during a specific expansion phase.
Get professional financial advice
Whatever the nature of your expansion, there are financial implications for the business and it’s always best to seek professional advice. If you need to build or purchase your own premises, for instance, it’s important to speak to a financial institution that has experience in this area.
For plant and equipment, you may need to consider a flexible financing option, either a loan or a combination of a loan and an equity investment. Again, an institution with experience in the field and in your own industry is essential.
As a wise veteran of business once said, "once the money’s spent, it’s spent - and there’s no going back". In the life of a business, a major expansion is a bit like buying a house or a car – one of the biggest financial commitments it will ever make.
This is the time to watch the rands and the cents. Decide on what you’re looking for - in terms of property, plant and equipment, office furniture, packaging and the like - and then shop around for the best quality at the best price. This can take a bit of time and attention, but it’s inevitably worth the effort.
Develop a Project Management Schedule for the expansion
Again, this may sound self-evident, but many businesses expand without treating the expansion like a project – one of the most significant it will ever undertake.
When drawing up a project management schedule:
- Identify key deliverables
- Attach dates to these deliverables
- Identify key responsibilities
- Set up a regular review schedule
- Identify procedures for managing non-delivery on any part of the project
- Build in appropriate timing and financial contingencies
Managing the process is as important as planning it and it’s important to commit to this in a formal way, building in the appropriate checks and balances.
Keep your customers informed
Expansion of any kind can cause disruptions in your day-to-day operations and it’s important that your customers know what to expect. Before commencing an expansion, tell them what you’re planning and what the expected completion date is. If possible, tell them what disruptions to expect and how you’re intending to deal with them.
Make your customers aware of the fact that the expansion will ultimately benefit them and explain how. Always reassure them that you have their interests at heart during the process. Direct mailers and on-site signage are two of the most effective ways of keeping customers informed during an expansion phase.
Announce the completion of your expansion
Once the expansion phase is complete, it’s important to let both existing and potential customers know about it. Tell them about the increased capacity of the business and the additional products and services you can offer. Develop a special marketing drive to announce the occasion and send out media releases, especially to the local and regional press.
Celebrate this moment in your business – it’s one of the best marketing opportunities you could ask for.
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