How to Know When to Grow
Small business owners make hundreds of important decisions every day -- from whether to order more inventory to how to improve the customer experience. But one of the hardest decisions every small business owner makes is whether -- and when -- to expand. Any expansion comes with risk, as well as the potential for huge rewards. Here are some questions to ask that can better enable you to determine when -- or in some cases when not -- to opt for growth.
Profitability and a stable balance sheet.
Have steady profitability and a stable balance sheet been the norm for an extended period? When considering whether or not to expand your business, it’s less important to focus on your history than on your recent track record. A relatively new business may be in a great position to expand due to market dynamics and profit margins. Conversely, if your business has been in existence for decades, but your profits have stagnated or been on a downward trajectory over the past few years, growth is likely not something to incorporate into your 12-month plan.
Are the health of your industry and your local economy strong and getting stronger? Before embarking on a growth strategy for your business, it’s important to take into consideration your industry’s ability to support such a move. Let’s say you own a mid-sized restaurant in a neighborhood with a handful of other eateries. If your neighborhood is continuing to develop, with decreasing vacancy rates in local housing and the introduction of new businesses, you might consider expanding capacity. Meanwhile, if your market is saturated with restaurants and not a day goes by without an "Out of Business" sign popping up in one of your competitors’ windows, it’s likely time to hold off on growth.
A bigger market?
Do changes in the appetite for your product or service suggest there’s a bigger market? If your business has had to turn down product orders because you’re already at full capacity, or you find there’s a consistent line of customers snaking its way down the sidewalk from your storefront, chances are good that you need to contemplate expansion. Whether it’s moving to a larger facility, hiring more staff or investing in improved technology, finding a way to meet increased demand can provide incremental revenue and generate sustainable growth for your business.
Is new talent opening up possibilities for new markets and relationships? Recruiting new staff can enable your organization to pivot in the marketplace and expand your offerings to customers. Let’s say you operate a small law firm. If you bring in a new partner whose expertise and relationships are beyond your existing focus as a firm, it can provide a valuable opportunity to generate new business and expand your practice even further.
Do customer inquiries indicate an opportunity in an adjacent market? Assuming you’ve been in business a few years and have a group of loyal customers, consider tapping these individuals to gather informal feedback. In some cases, you may get ideas for additional products and services you could be providing that would make your customers’ lives easier. If you’re a butcher, maybe your customers are looking for a sit-down sandwich shop. By adding a few chairs and tables, suddenly you’ve expanded your value proposition for your clients and increased your revenues in the process.
Appropriate funding in place?
Even a successful expansion may take a little while to pay off and could come with substantial upfront costs. Business owners should explore their funding options before taking this important step, looking at the costs and terms for SBA loans, traditional bank loans, credit cards and alternative finance options. The most important metric to look at is ROI -- how much incremental profit do you expect and how quickly do you need the money to pursue the investment? ROI can be very strong, for example, if a restaurant takes a loan to create patio seating with five extra tables that it feels confident can be turned two times each night.
Expanding a business is an exciting next step for owners. To determine whether or not you’re ready to pursue an expansion agenda, ask yourself what you expect from the expansion and how quickly you hope to achieve those expectations. If you know what you want and have assessed that you have the right team, marketplace conditions and funding in place to help you get there, you might just be ready to move into the next stage of your business’ lifecycle.
Dan DeMeo has more than 12 years of concurrent experience as a C-level officer for CAN Capital, 1st Financial Bank USA, and J.P. Morgan & Co. In these positions, DeMeo was responsible for all finance and accounting activities including planning, investment, management, portfolio and product pricing, and balance sheet management.