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Effective ways to financially prepare for expansion print Print

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Expanding your business is a significant step and requires some careful planning and consideration. Effective financial planning ensures your business grows smoothly and sustainably.

Putting plans in place to grow your business is exciting, but it’s important not to rush blindly into any big decision that could ultimately affect the profitability of your business.

Thorough research and forward planning allow you to assess the feasibility of your expansion goals and put the whole process in perspective. Read on for our top tips to help you prepare financially when looking to grow your business.

Firm up your justification

Expanding an existing business is a big step for even the most experienced entrepreneur. Growth can expose a business to a certain degree of risk, but careful planning and clarifying the main reasons for the planned expansion can help minimise potential issues.

There are many benefits and opportunities you can capitalise on through expansion.

For instance, being a larger business helps leverage certain benefits such as larger amounts you’re able to buy from suppliers, and strengthens your position for negotiating a better rate. With a larger operation it can also be easier to generate sales leads as your level of brand recognition improves.

Nail down your strategy

For your plan to be a success, you’ll need to have a specific strategy for what you’ll achieve and how you’ll get there. Think of it like your own blueprint for success and be prepared to revisit it regularly as you track towards your goals.

Be hard on yourself and ask the tough questions – such as “what is likely to prevent me from reaching my target?”

Once you’ve settled on a firm strategy, make your progress more achievable by breaking your plan down into specific milestones. Assigning clear deadlines for each stage will help to keep you progressing and give team members a sense of achievement with each new target you hit.

Remember to feed your strategy into your business plan – having your strategy documented on paper makes your business ideas more cohesive, and makes your business more appealing to investors.

Getting your forecasts in order

Depending on your business type, expansion could significantly increase your fixed and variable costs. It’s important to make sure you’re getting the balance right – will you definitely be able to cover higher costs in the short-term?

Forecasting your cash flow safeguards your business by giving you a glimpse of your likely future cash position, so you can uncover any unforeseen problems before they arise. Remember to analyse your variable and fixed costs in detail. Feed these costs for the duration of the expansion into a forecast, as well as for the day-to-day running of the business post-expansion.

It’s about ensuring you’ll be well-positioned to cover any expenses incurred while expanding – for instance, through upgrading equipment or purchasing assets. You also need to be sure that you’ve got enough spare capital to guarantee your larger business will be able to stay in the black day-to-day.

Run a pessimistic, realistic and optimistic version of your final plan’s financial forecast. This will help avoid the temptation to be overly optimistic, and demonstrates to potential lenders and investors how carefully you’re thinking about the implications of growing your business.

Consider consulting experts in the field and business owners with experience of growth – their advice may well help you draw up a more realistic expansion plan and avoid some hidden pitfalls.

Gathering capital

Depending on the type of business and scale of planned growth, bootstrapping – using your own operating revenue – could be a viable option. This allows a business to follow their own objectives with no external interference from lenders, but it can expose the business to financial risk. However, as the funds for expansion won’t come in one large injection, it does also place limits on the pace at which the business can grow.

If you‘re looking at external financing, the most obvious option is to discuss your plans with your bank manager to secure a loan. If you welcome the idea of having additional skills and experience on hand, you may wish to attract investors as another option. Having an up-to-date business plan with a well-documented plan of attack will help your business look more appealing to investors. 

Some owners launch their business on the stock market to raise capital for expansion. This may raise the profile of the business, and means ceding control to investors is avoided. However, it can be an expensive process and opens the business up to disclosure requirements. Needless to say, there are pros and cons to every type of financing so it’s critical to do your homework and seek professional advice.

No matter what your financing plan, it always makes sense to invest time in optimising your cash flow in the lead up to expansion – you’ll need as much cash on hand as possible for those unforeseen issues that inevitably pop up.

If you feel there’s room to improve in this area, use your expansion as a motivator to really tighten up your credit control, systems and processes, and overall spending. 

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