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As your business continues to evolve and grow, you will logically start thinking about expansion. Expansion is a risky venture, because it requires capital investment and brings major change to your organization. According to Industry Canada, small businesses account for 98.3 percent of employer businesses; medium-sized businesses account for 1.6 percent of employer businesses and large businesses are a paltry, 0.1 percent of employer businesses.
Whether you are small, midsize or large, it is essential that you make the proper considerations before you expand your business.
Will you benefit from economies of scale?
Usually, when a business expands, it will be in a position to reduce its production/service costs. You should only expand your business if the resulting economies of scale enable you to lower your rates and increase your overall profit. Expansion can be beneficial to your business if it allows you to protect yourself against your competitors’ rate reductions and take advantage of new resources such as better marketing options, more efficiently run facilities and additional product or service features.
Are your competitors expanding?
Doing market research can facilitate an educated and well thought-out decision about whether or not to expand your business.
If you can gather information about your competitors, you may be able to learn new ways to provide enhanced benefit for your customers or clients. Your competitors’ decision to expand may result from the discovery of new opportunities in the market, and you can either follow their lead or adopt a more methodical approach. Adopting a methodical approach enables you to determine if there is sufficient demand for your products or services and weigh the benefits against the risks of expansion. If you decide to expand your business, you should try to improve on your competitors’ ideas instead of just copying them. You never want to lose your competitive edge in the process.
Can you finance the expansion?
If you choose to expand your business, you may need to acquire additional facilities, equipment, inventory and/or manpower. It is important that you know exactly how much capital you need to invest and what your financing options are. Further, you have to ensure that the expansion will enable you to make enough profit to repay your loans in a defined amount of time and sustain your business. Countless businesses experience serious debt problems because they fail to plan their growth in a careful manner.
Are you prepared to leverage important responsibilities to others?
As your business grows, you have to run it differently and you will most likely become more dependent on your partners or employees. For example, if you plan to open a second production facility, you need to allow someone else manage it because you cannot be in two places at the same time. Transferring important responsibilities to others means that you will have less control in the management of your business. You need to be prepared to take a less hands-on role if you want to expand your business.
Will your customers/clients accept change?
Expanding your business means implementing a lot of changes, many simultaneously. Your customers may need some time to accept the new way your business is being run. For example, you may have previously established several close relationships with your customers by personally communicating with them and you may not be able to maintain such a close relationship if you decide to expand your business. This change could be detrimental to your business and therefore, any contemplated change must be seriously considered prior to expansion.
Can you maintain product/service quality and profitability?
No matter what you do, you will always receive some complaints. A large, rapid expansion may lead to unforeseen customer/client complaints that you cannot afford. Business owners do not want to compound problems in an attempt to maintain an expected product delivery/service level. The slightest shift in quality is enough to throw off an operation. Hence, if the complaints are adding up, consider a small expansion as a way to assist with managing everything.
Finally and perhaps most importantly, you must always consider your business’s profitability. Rushes and seasonality may throw the most well intended entrepreneurs off. It is far too easy to think that three or four solid months of increased business are a sign of stability and sustained growth. For example, if you choose to expand at the end of a busy season, you may be unable to support the business once the season ends. However, if you’ve had three, four or five years of sustained profitability, your prospects for continued success are greatly enhanced. Capitalize on that and consider expansion.
In closing, every successful business needs to consider expansion at some point in its evolution—knowing if and when to take that next growth step forward is key. Realizing the right time to expand can significantly mitigate the risk involved and help you build a stronger foundation for long-term, sustainable growth.
Written By: Ellis Orlan, CPA (IL), CGMA, Principal, Fuller Landau LLP, Toronto, ON, firstname.lastname@example.org, Futurpreneur Canada Mentor