Is it Time to Expand Your Business?
Every business owner knows that remaining competitive requires looking for opportunities to better serve existing customers and continuously grow your customer base. However, knowing when to make the leap and expand your business may be a challenge. Here are some reasons that justify business expansion.
- Your business is profitable and has enough capital to expand.
- You have a loyal customer base.
- The market in your industry is growing.
- Your cash flow is steadily positive.
- The business you have is more than you can handle.
- You recognize the need for additional products or services.
- Your in-house team is committed to supporting expansion.
- Your operational systems are in place and are scaled to accommodate expansion.
- You’ve outgrown your brick-and-mortar location.
- Customers are asking you to grow.
If your business checks several of the above boxes, then you have very good reasons to expand your business. Read more about each point:
Profitability and Capital
Turning a profit for three consecutive years is a good indicator that you can invest time and financial resources into expanding your business. When looking at profitability, it’s important to understand the difference between gross profit—revenue minus cost of goods sold—and net profit, or income generated by a business on a post-tax basis. While high gross profit indicates a healthy revenue stream, a business’s net profit must be sufficient to cover the additional overhead and operating costs that would be incurred during an expansion.
In addition to turning a profit, it’s also important to have adequate capital to support your business expansion. According to Investopedia, capital is a broad term that can describe anything that confers value to its owners, including a factory and its machines or intellectual property. Of the different types of capital, working capital is most relevant to expanding a business. Working capital is measured by subtracting current liabilities from current assets (by current, we mean liabilities and assets that are expected to be paid out or used up within one year). Working capital measures a company’s liquidity and represents its ability to pay its short-term debts and obligations.
Use this financial ratio analysis calculator to perform simple income analysis and determine your gross profit, net profit, and common liquidity ratios like current liquidity and quick (acid test) liquidity. Once you have a handle on common liquidity ratios, this calculator can help determine your working capital requirements.
A Loyal Customer Base
It’s gratifying when your hard work of offering quality products or timely delivery of services wins repeat customers. Maximize that by deepening the relationships with your clients or customers. If your business is business-to-consumer (B2C), offering incentives, loyalty or rewards points, referral discounts, encourages continued customer loyalty. If your business is business-to-business (B2B), giving referral fees to businesses who have referred clients to you or offering recommendations to collateral businesses are good ways to deepen existing relationships, which serve to expand your business.
The Market for Your Industry is Growing
Savvy business owners are usually aware of changes in their vertical. These changes can be influenced by any number of external market factors, such as technological advancements to natural disasters, to new, legal statutes, and even celebrity endorsement. The number of possible facets influencing your industry’s market is limitless and depends on whether your business is B2B or B2C.
Your Cash Flow is Steadily Positive
This might seem redundant from profitability, as previously mentioned, but there is a slight difference. Expanding your business is a risk, but this can be mitigated by taking a good look at your business’s cash flow. If your cash flow is both steady and positive, then risk is minimized when branching out to expand your business.
Your Business is Growing Increasingly Complex and Difficult to Manage
When you’re feeling stretched thin, investing time and resources in expanding may seem daunting, but it’s a good time to increase staff size to manage the workload. In this instance, it’s critical to make sure that your cash flow is steady and likely to remain that way, so you can support additional payroll responsibilities. It’s also necessary to budget time for onboarding and training new team members. The business coming in and its receivables must provide a steady basis for compensation packages.
You Recognize a Need for Additional Products or Services
During the pandemic, many forward-thinking business owners took a closer look at gaps in their respective verticals and wasted no time in pivoting their businesses by offering new products or services that complement their existing offerings. Expanding your product or service offerings may reinforce existing customer loyalty by satisfying a legitimate need.
Your In-house Team is Supportive
Employees who are appreciated and are committed to your company will support new ideas to grow the business. They will get excited at being part of something new and innovative, knowing that their job responsibilities will most likely increase, but the reward for greater company profitability will also increase.
Your Operational Systems are In Place and are Scaled to Accommodate Expansion
Having the foresight to build scalable operational systems that can handle growth will pay dividends when expanding your business. For example, as your business grows, your cash flow and liquidity requirements will become increasingly complex. Having a robust treasury management system as well as treasury management solutions in place facilitates growth by helping effectively manage your cash flows, optimizing working capital, and supporting sufficient liquidity to support growth.
You’ve Outgrown Your Location
This is especially true of businesses that offer products and have storefront locations. If you have a niche market and have expanded your business to offer ancillary or supplementary products in your geographic location, you may very well need larger commercial space in proportion to inventory demands and customer traffic. This principle also applies to personal services, such as hair salons.
Customers Are Asking You to Grow
This is the best reason to justify expanding your business. When customers are loyal and they want to support your business, they are often your best barometer as a reason for business expansion. Clients and customers with whom you’ve developed a good relationship will not hesitate to tell you what they need. Their honesty is commendable and speaks to how loyal they are to your business; in case they know that they could get a product or service elsewhere but would prefer to maintain the relationship they have with you.
Owning a thriving business is a good challenge to have. When your hard work to develop and sustain growth and profitability hits a critical mass, the criteria listed above become more pronounced and are solid reasons to expand your business. If you have decided the time is right to grow, check out our article on ways to expand your business. In addition to the links provided above, please click here to learn more about what is involved, and required, when expanding your business to a new location.
For more information about expanding your business, please reach out to a Cambridge Savings Bank business banker today.