Perhaps you’ve been selling the same products for a while and want to evaluate your inventory. Maybe you’re a seasonal business owner looking to bring in extra cash during your slow season.
Both of these circumstances may lead to a crossroads with your finances to consider at each possible turn but rest assured, they also represent an opportunity to grow your business.
Should I Expand My Business?
When considering how to expand your business, there’s no “one-size-fits-all” solution for moving forward. If you’re already doing everything you can to grow your business based on your current product or service line, you might consider adding a new angle to your menu. If you’re thinking of taking the plunge, start by asking yourself these four questions.
Which Product or Service Should I Add to My Current Offerings?
When considering a new product or service, you should think about which offering will let you tap into your existing expertise and resources. Here are a few examples:
- An accountant specializing in tax returns for people with money to invest might be able to leverage the relationships she already has with her clients to offer investment management and financial planning services. The accountant already understands the tax implications of various investment strategies, so the learning curve would not be as steep as if she were branching into an entirely different field.
- The owner of a seasonal landscaping service working in a region with lots of winter snow could begin to offer snow removal services. Perhaps some of the vehicles used in the landscaping business could be repurposed as snow plows, and seasonal staff may be looking for employment year-round.
- A retailer specializing in men’s jackets and coats made from a distinctive fabric could begin selling women’s coats using the same fabric. His original customer base could include men who would want to buy their spouses a coat made of the same fabric. Or if women had been buying men’s coats for their spouses, they might welcome the opportunity to buy one for themselves.
Still, while a particular new service or product idea might sound logical, you’ll need to do some market research before moving forward. For example, the accountant might feel out her clients to see how many would turn over some of their assets for her to invest on their behalf, as well as find out what licenses and certifications she might need to become an investment advisor.
What Resources Will I Need to Expand?
Assessing the resources that will be required is possibly the most fundamental question to address when asking yourself, “Should I expand my business?” For example, will you need to add to your staff? If so, how many more people will you need, and how much will you need to pay to get the right people on staff?
If you’re thinking about adding a new product, will it require new equipment and extensive training on how to use the equipment? What will it cost to perfect the product or service, then market it effectively? Will you need more physical space for inventory storage, display and/or space for new employees to work? Will this expansion require that you buy additional liability insurance? What would that cost?
You’ll also need to forecast your cash flow to discover your financing requirements. You’ll determine how long you’ll be spending money before you generate enough sales revenue to cover your operating expenses and any new equipment purchases. This forecast will also help you predict if the initiative will be profitable. If you don’t see a payoff in the not-too-distant future, it may not be the right time to pursue the expansion.
If you determine that you’ll need to borrow some funds to expand your business, you’ll need to add your anticipated interest cost to your cash flow forecast, plus the cost of paying down the amount you actually borrow.
If you’re lucky, a new service or product will have a quick payoff. But often it takes time to become profitable, and only you can decide how long you can afford to wait. However, when borrowing funds, lenders have their own criteria, so you’ll need to be sure you’re on the same page.
When Should I Expand?
Once you’ve decided to move forward, you come to the question of timing. In some scenarios, how to expand your business could be dictated by seasonality. For example, the landscaper wouldn’t launch a snow plowing business in July, nor would the coat seller introduce his new women’s line in April. But less obvious timing issues include:
- How long will it take me to acquire the knowledge and resources to make this possible?
- How much lead time will I need to prepare the market for the new product/service before I offer it?
- When will the demands of my main business be at a minimum so that I can devote enough attention to the new venture?
Answering these questions can help you determine the best time to expand your business.
How Will I Measure the Expansion’s Success?
The last task is establishing criteria for determining success. As stated, profitability within a reasonable (a subjective term) amount of time is critical — but you’ll need more than a simple number or ratio to declare victory or defeat. While the bottom line is the bottom line, initial financial success (or disappointment) can be short-lived.
Consider some additional factors to gauge your success, including:
- Has launching my new product or service had any serious negative impacts on my original core business, such as a loss of customers due to neglect while I have been concentrating on the new one?
- How well has my team (including newly hired employees) withstood the challenge of launching the new service/product? Has there been a spike in turnover?
- Am I getting positive feedback on the new product or service? Will buyers recommend it to their friends and peers?
- What proportion of all of the potential customers for my new service or product have I connected with so far?
- How accurately did I forecast revenue and expenses? If the numbers aren’t as good as I expected, can I make adjustments that will improve the bottom line going forward?
As you are working your way through these questions, take advantage of the expertise and insights of other people who are poised to supply helpful answers. Your financial partner probably belongs on that list. Good luck!