“They say the universe is expanding. That should help with the traffic.” – Steven Wright, comedian
A good problem that many business owners run into is if, when and how to expand a business. The business you started seems to be doing well and then you notice signs that you may be at capacity or you feel that you are missing out on opportunities. What do you do then? How do you analyze the feasibility of adding infrastructure? How do you pay for the costs involved?
First, there are certain signs you should look to when determining if it is the right time to expand. Things such as:
- Your workers or facility cannot keep up with demand – Are delivery times slowing down? Are you having trouble keeping inventory up to adequate levels?
- You have more inquiries than you can address – Are you losing out on potential business because you cannot respond fast enough?
- You uncover an untapped market or opportunity – Is there a product that will help you diversify? Is there a region that consumers cannot get your product?
- You maneuver to stay ahead of the competition – What is happening in your industry? Are competitors expanding or losing customers?
Once you have determined that you have the opportunity to expand, you then need to determine if you should take that step. You should examine what your long term ownership goals are. If you plan on owning the business for several more years, an expansion could greatly increase the value of your business for the future; or the risk of expansion could be lessened by having time to recover from a potential miscalculation as you grow the business. If you plan on owning the business for a short time, then you might not want to take on too much risk and effort enlarging what you already have in place. If you have a strategic plan in place, refer back to it and see how an expansion fits into the original plan. If you haven’t completed any strategic plan, now could be the time to incorporate one into the next phase of your business.
If the opportunity to expand makes sense, then you need to go through a similar exercise as when you started the business. You need to decide if expansion will come from internal growth, acquiring new technology, acquiring a new facility, or by acquiring an existing business. You need to prepare a business plan and analyze what you need to accomplish the growth. Make a list of equipment, man power, and other infrastructure you need. Prepare a financial projection to test the feasibility of the expansion from a cash flow standpoint and to analyze the amount of time it will take you to recoup the investment or how fast (or deliberate) you want to be in paying back debt. Look for efficiencies you can take advantage of by utilizing the existing infrastructure and factor those into the projection model.
There are many factors to consider when deciding whether or not to expand a business. Taking a systematic approach like going through the questions and steps above can help you through the decision making process.