If you’re looking to expand your business, you want the best possible chances for success. Among the factors you’ll have to consider is your budget.
Budgeting for expansion is a critical step for ensuring growth without overstretching resources. For small business owners, it’s about balancing investment with cashflow while planning for unforeseen expenses.
Here are some things you can do to set yourself up for success when the time comes to expand or scale your business.
Understanding your goals will enable you to determine how much money you’ll need to finance your expansion.
Understand your goals
A good place to start is knowing exactly what you want to achieve and the cost of doing so. This can be anything from opening a new location to expanding your product lines to entering a new market. Each has its own factors to consider, and the costs associated with each will vary.
Budget for growth
Depending on the scale of your expansion, both your fixed and variable costs are likely to be higher than before. Make sure you’re prepared to cover these higher costs:
- Forecast your cashflow and analyze your expected variable and fixed costs in detail, pre- and post-expansion. Break down your expansion into phases, for example: market research, hiring, marketing, inventory increase, or adding capacity.
- You’ll need to know your one-time costs and any ongoing working capital expenses. One-time costs can include construction or renovation costs, new equipment, facilities or locations. Ongoing expenses include employee salaries, rent, inventory and marketing costs.
- Forecasting will highlight any potential areas of risk or hidden problems. In addition, if you’re not quite sure about some details of your strategy, running scenarios through your forecasts will help to improve the pace and scope of your plan.
- Run a pessimistic, realistic, and optimistic version of your forecast. This will help avoid the temptation to be overly optimistic. When you identify risks, plan to mitigate or address them. For example, by having enough cash reserves on hand to cover costs for a year.
Set up a cash reserve with 3-6 months of expenses as a buffer to handle these anticipated costs and get your accountant or financial advisor to confirm what you’ve planned is realistic.
Seek advice from any other business owner in your industry with experience in growth.
Financing your expansion
Depending on the type of business and scale of planned growth, your own operating revenue or cash reserves could cover your costs. This allows for you to proceed without taking on additional debt or taking on investors. On the other hand, borrowing money or finding someone to buy a stake in your business may be a better way to get the cash you need.
In terms of external financing, talk to a Coast Capital Business Advisor to determine which of our lending products will fit with what you need – whether a loan or line of credit. Some owners seek to raise capital in other ways, for example:
- Crowdfunding, where many people give you money for a certain project.
- Angel investors may be willing to invest their money in your business, especially if it aligns with their expertise and mission. In exchange, they may want a say in how you run your business, so be prepared to seek out their opinion.
- Friends and family may be willing to lend you money to help you grow your business. Be very clear about how much you need, how it will be used, and how you plan to pay them back, so everyone’s expectations are properly managed.
- Self-funding, where you invest your own personal money into the business so as not to put your business’ finances at risk or take on additional debt. If you don’t need a lot of additional financing, this may be a smart way to go, provided your personal finances are healthy. Often business owners use an equity in their personal homes to fund growth.
If you’re scaling your business, having systems in place that enable you to scale will make the process easier and more efficient. You could scale your business by identifying new customer segments to target, by using technology to improve efficiency, by licensing or franchising your business, or by collaborating with complementary businesses.
Calculate your burn
You could also calculate your cash burn rate and your cash zero rate, so you have some timeframes in mind for achieving a positive cashflow after expansion.
Spend time on your expansion plan
As in all areas of business, planning and budgeting for expansion requires careful thought and time. No matter what your financing plan, it makes sense to optimize your cashflow in the lead-up to expansion so you have cash available for any unforeseen circumstances. Use your expansion as a motivator to tighten up your credit control and spending.
Next steps
- Use a cashflow forecast to assess the impact of expanding and when you think you’ll break even on the anticipated added expense. Talk to a professional with knowledge in your industry so you can anticipate obstacles.
- Identify if you can leverage existing assets such as underutilized staff or equipment to support expansion without significant new investment.
- Negotiate better terms with suppliers based on your increased volume of purchases.
- Once your expansion is underway, continuously monitor the performance of the extra spend and use KPIs (key performance indicators) such as sales growth, customer acquisition costs and return on marketing spend to assess your progress and success.
