Growing your business can be both an exciting and a terrifying thought. How do you know when is the right time? What are the reasons to grow? What are the risks associated with expansion? These are questions business owners often face when they start thinking about growing their business.
Here are the reasons to consider for growing your business:
One of the key reasons to grow business is to meet the demand from your customers. If you find that your customers are starting to come to you for products you don’t yet offer, leaving your store empty-handed because you can’t keep up with demand, or unable to receive related service beyond what you offer and you have to refer them to another business, it might be time to consider growing the business.
You might consider expanding your business to reach new customers, or when you see new markets for your existing products/services and that there's an increase in demand. On the other hand, you might also want to consider expanding your business when you find your customers are moving to your competitors to get products/services you don't offer.
The second primary reason to grow a business comes from changes to products, services, processes, or the industry. When these changes occur, it may be necessary to grow your business simply to survive.
When product/service requirements change and additional investment in machinery and equipment is necessary, a business may have to grow to recover the cost of this investment. At the same time, if production processes change and investment is required in equipment, machinery, systems, or other processes, it may also mean that you’d need to grow and expand your business to recover the costs of these investments.
Survival also means looking at your competition. If your competitors have left the market, growing your business may provide an opportunity to capture customers formerly served by your competitors. Likewise, if a new competition has entered the market, you may want to expand your business to maintain market position and fend off the new competition.
Growth makes sense when it is profitable. Profitable growth is driven by customer demand and the need to remain competitive and is dependent on access to funding and organizational capacity.
It is important to note that a growing organization requires a commitment of both time and money. So when you are considering whether to grow your business, you want to ask yourself: does the growth direction fit into your planned path, or is this where you want to go if it means devaluing your brand?
Therefore, a key question to consider is: do you have access to cash for growth? Once you expand your business, will this increase or decrease your profit margin?
Before you decide to expand your business, it is critical that you have ready access to cash as you can be expected to incur additional costs, such as system or process upgrades, new machinery or equipment, and additional overhead/wages. Some possible funding sources could include cash that's already in the business, additional investor funds, loans, and potential government grants and subsidies. When considering growth, it’s important to estimate the amount of funds you’d need and identify the source of funding before you actually act on growing the business.
Chad Chang, CPA, CGA and Matthew Wong, CPA, CMA are the co-founders and advisors of Purpose CPA. Purpose CPA provides accounting, advisory, technology services to small and medium-sized businesses that are interested in more than just the bottom line. For more information, visit CPABC's FinLit site.