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Business growth and expansion seem like inherently good things on the surface. However, if it isn’t approached carefully, it could be the thing that drives your whole venture into the ground. You can’t just make a snap decision to open a second office, or tap into a new niche. If you feel it’s time to expand, and want to make sure your business comes out on top, here are some important considerations to chew over.
Are There Scale Economies That Will Help your Expanded Business?
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As your business expands, costs per unit will fall. This will result in higher profits, lower prices, or both. Small businesses should only really expand when there are economies of scale that will allow you to either drive down your prices, or drive up your profits. If expansion in a certain area will allow you to buy more, then it’s a good sign. When you’re buying in high volumes, you’ll be able to negotiate discounts with your vendors, and get lower prices on almost everything, from raw materials to transportation, and even things like warehouse space. Furthermore, you’ll be in a much better position to prevent under-cutting from your close competitors, and mount this against them yourself. Administrative costs-per-unit can also be lowered, allowing more access to marketing, ordering and other functions.
Can you Finance the Expansion Internally?
Before you decide to go ahead with an expansion, you need to look into the financial benefits of the prospective growth, and whether your current cash flow can support the investment you’re going to have to make. It’s essential to figure out how you’ll secure the funds for additional inventory, facilities and equipment. With all these new assets, you’re also going to have to think about the greater need for commercial insurance to protect your expansion once it’s happened. When you start looking into the policies you’ll need, make sure you’re able to source them from the right institutions. There are various advantages of using business insurance brokers for all of the coverage you’ll need, rather than going with a mix of different providers. If you need more capital, whether through an equity infusion or a loan, make sure you’re running some accurate projections, and making sure your business will generate enough profit to pay off your outstanding debts.
How Will Your Customers Influence the Growing Pains?
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Timing is absolutely essential for many things in business, including carrying out major expansions. Economic downturns, political shifts, and things like natural disasters and terrorism, can all have a massive impact on consumer behaviour. If people aren’t buying as much as they used to, how is this going to affect the demand for your products, and in turn, your bottom line? Unless you have a totally unlimited supply of capital, then the risk of reduced demand is a serious threat that needs to be addressed. Before moving forward with any plans for expansion, you need to make 110% sure that the current market conditions can support your business through its growing pains.
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