For those entrepreneurs who have planned for success, executed their plan and managed the operation well, they see a job well done and most likely that business is good. In fact, it is so good that profits are positive, cash flow is positive, costs are under control and sales trends are upward. Customer demand for the product or service is increasing.
But is this growth?
That thought may begin to get some traction in an entrepreneur’s mind as the limitations of the operation, or the potential to gain new business and generate sales, become apparent. At this point, the small business owner may be considering what can be a most risky move — expanding.
This move may be second only in terms of risk to starting up a new venture. Of course risk generally does not scare, or at least put off, entrepreneurs. Most successful entrepreneurs are not risk averse, but rather are risk managers in the sense the risk is identified, acknowledged, addressed and managed, not ignored and left to the winds of the market.
What does expanding mean in terms of business? It can be taking on new product lines or lines of service delivery. It could be building onto a current location. It could be building an entirely new structure or adding multiple locations. An expansion, in whatever sense, boils down to doing more planning and more managing.
Are you thinking of expanding?
If so, let’s look at some items to consider:
1. Reason: Always begin with asking yourself why you believe you need to expand the business.
Before rushing into an answer, give it some thought, real thought. And give it some real time, not just 15 minutes between dropping off the children at school and running through the list of the day’s demands. A pen and paper approach may work best at a quiet time that you have or make for yourself.
Write down the reason(s) why you think you want to expand and then ask yourself if these are good reasons. If one of the reasons is more demand than can currently be met, that might be a good reason to consider expanding. Go through the time and thought process.
2. Demand: Is there a change in the amount of demand you see from you clients?
Is it true demand or a fluke? Is there a steady increase in demand or is the increase due to some abnormal market/selling factors or at the height of your selling cycle? Is the increase in demand sustainable? The demand must be sufficiently solid on which to base an expansion.
3. Capacity: The consideration here should be in determining if the current operation can support the increase in product or service lines.
If your business is manufacturing, can the current process produce more product, or does new equipment have to be purchased?
Is there excess capacity that can absorb the increase in production, or is the operation already producing at full tilt? And if equipment is to be purchased, does the current facility have the space available to accommodate the new equipment?
If your business is retailing, is there sufficient space to stock the additional product lines as well store inventory in warehouses or stock rooms? If your business is a service, do you currently have people who have the ability and time to increase the service provided? If you hire new employees, is there physical space to house them as well as the ability to pay for them?
4. Capital: Money will be needed to fuel the expansion. The question is how much. Is there money to buy new equipment, add onto an existing structure or buy/build new ones? Is there money to buy more product as well as pay for more employees? If not, can we borrow it at a cost that doesn’t negatively impact cash flow and eat up the anticipated profits?
5. Yourself: Does the expansion expand the organization to the point that your ability to manage it yourself is exceeded? Do others need to be brought in to oversee aspects of the business such as finances, shipping or human resources? More importantly, can and will you give up some control? Are you willing to take on more risk and manage more yourself. Are you to willing pay yourself the same amount of compensation? Are you able to pay additional management?
This is not an exhaustive list. Other issues such as competitors (Are you expanding when everyone else is or no one else is?), costs (What happens when you buy and sell more?) and marketing are also to be considered. So what is the first step in considering an expansion? It is developing a business plan.
How else can you examine your assumptions and test your projections? A business plan is a test drive. Take your expansion idea out for a spin. The next Entre101 is March 27.
Please contact Terry Reeves, concierge and director at EntrePaducah or myself at the Murray State University SBDC for registration or further information.
Chris Wooldridge is district director of the Murray State University Small Business Development Center, a member of the Kentucky SBDC network. The center provides high quality, in depth and hands on planning, consulting and training. Call 270-809-2856 for more information or to schedule an appointment. On the Web: ksbdc.org.