When clients ask if it’s a good time to expand, it’s usually because they want to hire a new employee or expand their business footprint. Often times, the problem is two-fold. It may be time to hire a new employee but not necessarily time to expand the business footprint or vice versa.
Before considering any form of expansion, management needs to analyze the company’s projected and actual numbers. The decision to expand cannot be made on emotional intuition alone. This step is often overlooked by business owners, to the detriment of the business and its growth.
Before deciding to expand, I would recommend taking these steps:
- Create a budget based on actual current operations without the consideration of expansion. Before any expansion, you need to understand how your current operations are doing. Real numbers are crucial! Don’t anticipate revenue from a client you haven’t landed yet.
- Estimate the total initial costs of expansion. If the expansion is to increase your workforce, you will need to consider a new employee’s yearly salary/wages, along with recruitment fees and additional equipment/tools necessary for them to perform their duties. If the expansion is to increase your physical footprint (i.e. expanding a warehouse/showroom), you will want to consider all building costs, along with additional equipment/tools necessary for operating the addition.
- Estimate additional yearly costs of the expansion. If the expansion is to increase your workforce, this typically will be the salary of your additional workforce. If the expansion is to increase your physical footprint, you will want to consider all yearly operating costs (i.e. utilities, maintenance).
- Estimate the additional yearly revenues related to expansion. If the expansion is to increase your workforce, you will want to consider the additional revenue the workforce could bring in and any potential cost savings of adding the workforce. If the expansion is to increase your physical footprint (i.e. expanding a warehouse/showroom), you will want to consider the potential revenue and potential cost savings the additional footprint provides.
- Compare the estimated additional yearly revenues with the estimated additional yearly expenses. If the results are negative, you should not expand because your business will be losing more money than it will be bringing in. If the results are positive, compare them with the estimated total cost of the expansion. If the results will return 100% of your investment within one year, it is more than likely a good time to expand. If the return on investment is greater than one year, you may want to consider other options that will return your investment within a one-year time frame.
If you’d like additional information on how these steps apply specifically to your business, click here to schedule a call.