Expanding: Financing additional businesses

Entrepreneurs have a reputation for getting addicted to the game. With one start-up running successfully they immediately find a new project to fuel their passion for business. Whether it is a good idea or not highly depends on preparedness. It is not only about accepting risk; that is part on the entrepreneurial persona. Expansion success lies in a forward thinking approach that minimises risk at every step.

Sourcing Capital

In a perfect world an entrepreneur would finance new projects with money straight from their own coffers. In reality, most people need to look outside the business for the cash. Bank loans are an obvious choice to source capital if the company’s lending history is strong and the established business has the documentation to put ticks against the bank’s stringent criteria.

However, too many businesses are unable to meet their obligations to the bank if they have taken on too much too soon. To avoid filing for bankruptcy or liquidating assets, businesses can ask their accountant draw up realistic cash flow projections (before applying for the loan). Then they need only commit to a loan with the confidence they can maintain the repayment schedule.

Alternatively, there are venture capitalists and angel investors willing to put money into promising businesses for a percentage of future profits. It worth remembering investors own part of the business and will hold the business manager accountable for every decision made.

What to consider

Whatever the expansion plans are, either product lines or new locations, setting it up feels a lot like starting from scratch. If the business isn’t coping as it is, the risk is that it will collapse under the increased demand. The profits are not the real issue. Rather, it is being under control in all aspects of daily operations. Are deliveries arriving on time? How are the staff performing? Are customers giving good feedback? Expanding requires all of the time and research investment that was given to the initial start-up. Once again, business owners will be applying for permits at the council, recruiting committed staff, and doing market research applicable to that specific location.

Yet there are certain benefits that come from scaling up. The rule of thumb says it is only wise to expand if increasing the size of the business and output will result in reduced overheads and increased profit margin. There is more opportunity to negotiate better deals all round. Suppliers are going to be more amenable to selling units at a lower cost if they are shifting higher volumes. This rule can apply to everything from raw product, storage space and even insurance premiums.

Learn from all mistakes

Remember to learn from the competition’s successes and failures. If you don’t know what the competition is doing, get out and do some fieldwork. The product or expansion plan mightn’t be unique but there’s always room to provide customers with better value so they come to you first. As a business owner you might feel spread thin, but your presence in the store will help build rapport with the customer.

Proceeding with expansion plans based on a vision alone is not enough. If you are not ready emotionally or financially, relax and take all the time you need. While enjoying your current success, gather your strength for the next ambitious campaign.

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