Foreword
You intend to expand your business but you do not know where to start or what elements are essential to create an expansion plan? We can help you with this article which includes the steps required to design and implement a business development strategy.
Whether you intend to access new markets, to launch new products or services, or even to increase your operational capacity, this is an important step for any entrepreneur and requires a well-developed plan. It is not enough to see the opportunity, it is important to carefully analyze the company’s financial capacity to support business expansion and all the rest of your business resources required for strategy implementation.
This article will guide you by taking into account the main financial aspects that you need to consider in order to make a wise, calculated and sustainable decision.
Analyze your business’s current financial situation
The first essential step before developing your expansion plan is to understand where you stand financially and what financial resources you have available to grow your business. This step is often underestimated although it is the foundation of any well-thought-out plan.
In this initial step, you have to undergo 3 steps to clarify your business’s financial situation:
- Analyze basic financial indicators: profitability, cash flow and debt. Ask yourself a few questions about each, such as: Is the business consistently profitable? Is the profit margin strong enough to support a major investment? Do I have a positive cash flow? Are there any delays in receipts or difficulties in paying suppliers? What is the income percentage that goes towards debt repayment? Do I have room to access new forms of financing?
- Check financial stability: by analyzing financial reserves and the ability to honor mandatory recurring debts. Provide your answer to these questions: Do I have financial reserves available for unforeseen situations? Have I encountered recent problems with paying taxes, salaries or other current obligations?
- Review financial reports: it is very important to correctly and completely understand your business balance sheet, profit and loss account, cash flow report, as well as basic financial indicators – EBITDA, liquidity ratio, return on capital.
Set expansion financial goals
The next step after your business current financial analysis is to define business expansion financial goals, in order to define clear targets and ways to measure your results as concretely as possible.
More exactly:
- Set clear financial goals: answer a few key questions to help you set your business financial expansion goals. These may include: “How much do I want my turnover to grow in the next 12–24 months?”, “What is my target profitability level?”, “What profit margin do I want to maintain after the expansion?”
- Project different financial scenarios: in the 3 possible versions – optimistic, realistic, pessimistic – to estimate the impact on revenues, expenses (fixed and variable), but also the impact on profitability and cash flow.
Do not forget one key aspect: a sustainable expansion plan requires careful tracking of your return on investment (ROI) and the time required to reach break-even. Keep these metrics in mind.
Estimate your business expansion costs
Do not underestimate your business expansion costs, as it may be the reason for which your plan will fail! This next step is extremely important, as it is essential to identify and quantify as precisely as possible all expenses categories necessary for the expansion.
Carefully analyze the following:
- Direct costs: such as purchase or set up a new workspace, purchase equipment, machinery or software, hire or train additional staff
- Indirect costs: such as increased administrative and operational costs, advertizing and marketing for new markets, legal, accounting or consulting expenses
- Hidden costs: which may include transition costs for work processes, extra time allocated to adjustment periods, possible penalties or delays in products or services delivery, etc.
Identify proper financing sources
Once you have conducted a current financial analysis of your company, set financial objectives and draw up a detailed and realistic expansion budget, as it is time to identify the financing sources which will be able to support your expansion plan. More specifically, you have to identify where the investment money can come from.
There are 2 possible sources:
- Internal sources: by reinvesting available profit or by using available cash reserves.
- External sources: such as bank loans, operational leasing, non-reimbursable European funds, private investors.
Each option has its specific advantages and disadvantages, but it is essential to choose based on your business specific needs, on the company maturity and considering the accepted risk degree.
Analyze Financial Risks and Design a Backup Plan
However promising and well-thought-out a company’s expansion strategy may seem, there are always risks associated with it. It is important to carefully analyze financial risks and other risks that may arise and design a backup plan in case they materialize.
Take time to:
- Identify potential risks: which may be of the nature of sales below expectations in new markets, unexpected cost increases, implementation delays, cash flow issues, etc.
- Build a contingency plan: allocate a cash buffer, establish costs that can be reduced or postponed if necessary, but also prepare alternative scenarios in the event that estimates do not materialize.
Conclusions and recommendations
Business expansion is not only an opportunity, but also a great responsibility. Beyond excitement and euphoria, it must be based on a solid financial analysis, on clear objectives, a realistic budget and on well-anticipated risks. Unfortunately, the lack of such elements can turn a good intention into a risky decision. This is precisely why it is important to allocate sufficient time and effort to design a solid business expansion strategy.
If you are looking for experienced and professional support to evaluate your business expansion plan financial feasibility, the ELFWISE team can help you with personalized consulting, adapted to your business needs.
We are ready to support you with a careful analysis of your business current financial situation, a proper budgeting of income and expenses, advice on different accessible financing options and a careful analysis of the potential risks that may arise.
Contact our team with confidence by using the email address office@elfwise.ro or the phone number +40 769 638 834.
In case you would like to stay close to us and discover useful and educational information in the field of financial management, do not forget to follow us on social media: Linkedin, Facebook, Instagram.