Plan Before you Expand
4 Musts for successful growth
Expansion and growth are attractive goals for every business, but for small businesses trying to reach the next level, it can be difficult to know when to grow and how to plan for it.
With Small Business Saturday just behind us, here are four indispensable tips to help you plan for the next phase.
1. EARN THE DEMAND
Did you know 73 percent of companies go out of business because they're overly optimistic about sales? Sometimes this is because they focus on unreliable indicators to gauge success.
One classic mistake is businesses that expand aggressively based on a single large client or a few new accounts. However, companies need strong, consistent and loyal customer bases, rather than a mere one-off surge to experience long-term, meaningful expansion. Those one or two large customers might be big wins, but even those eggs don't mean much if they're all in one basket.
According to many business experts, including Mike Kappel from Forbes, it makes sense to expand when demand exceeds your capacity. Recurring revenue and net income are the most reliable indicators of consistent demand.
KEY TAKEAWAY: Make sure your demand and customer base are solid.
2. BUILD THE FOUNDATION
One major reason why this happens is they lack the infrastructure to adequately grow. When businesses expand based on lofty projections, there's also the risk they'll begin expanding without the systems, processes and management necessary to properly scale.
As an example, we once knew a company that signed some major retailers to carry its product. They decided it was time to build a larger warehouse to manage the influx. Unfortunately, they didn't have the support or management necessary to oversee construction and maintain sales simultaneously. Sales declined and they struggled to regain their footing. It's a solid reminder that your infrastructure needs to be ready to scale before anything else.
KEY TAKEAWAY: Make sure your business is prepared to grow efficiently without disrupting any critical operations. After all, building the plane as you fly is pretty risky.
3. SUPPORT THE CORE
We've all heard this sage advice before, but for those who've been through successful business expansions, it's not entirely accurate. Yes, businesses do have to spend money to make money, but this doesn't mean that swanky new office or costly promotional campaign will lead revenue to swell. While granite countertops in the company kitchen will make an impression, it won't have a measurable impact.
If you're spending to drive growth, make sure you invest in the right things. What exactly are those things?
We typically recommend investing in efficiencies: Talent, processes, systems and equipment that can build a stable foundation, help meet demand and increase production.
For example, if your team provides a lot of value, employee raises may be a good place to start since they reduce turnover and boost morale. Companies can spend as much as 150 percent of an employee’s salary, just to replace them, so retention is the gift that keeps on giving.
KEY TAKEAWAY: Focus your investments in areas with trackable ROI.
4. KNOW THE FLOW
Approximately 82 percent of businesses fail due to poor cash flow. That is the largest reason companies go out of business. In fact, we see more businesses get in trouble from failing to monitor cash flow than any other single factor. So, we always advise business owners to develop a thorough understanding of what cash flow will look like through the entire expansion process.
As a general rule, it's good to have sufficient cash flow to cover three months of operating expenses and payroll. The Balance Small Business, an expert resource guide for entrepreneurs, also suggests keeping tabs on your accounts receivable versus your accounts payable, especially during expansion. New and developing businesses need working capital to grow, and misunderstanding your cash flow can lead to underestimating your working capital needs.
KEY TAKEAWAY: Work with your financial team to understand your cash flow for the duration of the process and make any necessary adjustments before moving forward.
DON'T FORGET TO
Business expansion is a serious undertaking that demands careful planning, but it’s also an extraordinary and exciting landmark to reach. Even as you look forward to what comes next, take time throughout the process to reflect, celebrate and thank your team — you’ll be glad you did!
Jake Wuest is the senior vice president of business banking at FirstBank.