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Budgeting for expansion

Plan ahead to make sure your expansion goes as smoothly as possible

Growing your business can seem daunting. With good research and planning, you can put the process into perspective. Here we take you through the main financial considerations of business expansion.

Making your decision

Choosing to expand your business can be a difficult decision. Growth can expose your business to risk. But careful planning and research can ensure you minimise it. You can also take advantage of the many benefits and opportunities that expansion offers.

An example of this is that being a larger business can help in negotiations – buying in a larger quantity means you’re in a position to secure a better price. It can also become easier to generate sales leads as your brand recognition improves.

Exactly what are you aiming for?

The more honest you are with yourself, the smoother the process should be. You need to be sure of what you’re trying to achieve. You need to be sure of the timescale, and whether it’s achievable. Why have you chosen these particular goals?

Once you’ve decided on your strategy, make a plan that’s broken down into individual, measureable goals. By properly timing the processes and having deadlines, you and your staff will know you’re making progress and feel a sense of achievement as each target is reached.

Your expansion plan should include the economies of scale available to your company; that is, when does output lead to profit being optimal? Can you source enough raw materials locally to satisfy your plan?

You may be producing 1,000 units a month in your one warehouse. But can you produce 1,500 units with the same infrastructure? Variable costs will increase as production increases, but fixed costs will remain the same – which should improve your profit margins. However, acquiring a second warehouse (and more staff, power, machinery etc) will reduce your profit margins until the next optimal point.

It’s important to know when to exploit economies of scale. There’s no point upping production and taking on a second warehouse if there’s no demand for the product. The ability to spot this is just one part of your overall expansion consideration.

Budgeting for growth

As you expand, your fixed and variable costs are likely to increase. It’s important to make sure your expansion is able to cover these higher costs.

You need to accurately forecast your cash flow. To do this you need to work out your new fixed and variable costs. You then need to input these into a forecast and add in the increased day-to-day running costs too.

The aim of this is to ensure that any large expenses incurred while you’re expanding are covered. You’ll also want to look at the day-to-day running of your business after the expansion has happened. Will you be able to run your business and stay in the black? This may mean forecasting further ahead than you usually do.

Forecasting alerts you to any areas of hidden risk or problems. You should run pessimistic, realistic and optimistic versions of your plan’s financial forecast. This will prepare you for each eventuality and show potential lenders and investors that you’re thinking carefully and clearly about growing your business.

Always run your projected figures past your accountant, and also try to meet with any experts in the field. Their knowledge could help you draw up a more realistic plan, and help you avoid any potential pitfalls.

How will you finance your expansion?

This depends on the type of business you run and the scale of your planned growth. Sometimes ‘bootstrapping’ – where you expand using your own operating revenue – can cover it. This means you can expand with no external interference from lenders. But it does expose the business to financial risk. It also slows the pace of expansion, as the funds to enable it won’t come in one large payment.

The simplest way to finance an expansion is to talk to your bank and try to secure a loan. Or you could see about attracting an investor. They may even be able to bring additional skills and experience to the project.

Another way to raise capital for expansion is to launch your business on the stock market. 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. There are pros and cons to every type of financing, so make sure you do your homework.

Make sure you invest time in optimising your cash flow as you get ready for expansion. It helps to have as much cash on hand as possible for any unforeseen issues. If you think there’s room to improve, use your expansion as a motivator to tighten up your spending and credit control.

This guide is intended as general advice only, and not intended to cover specific circumstances and needs. The information in this article is also not linked to any of the products offered by Clydesdale Bank PLC.

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