With claims that the economy is officially out of the recession, entrepreneurs should be looking for ways and means to take advantage of opportunities the market is offering, and almost more importantly – the opportunities that will manifest once the economy has truly recovered.
However, economists agree that the credit crunch environment has not yet passed and caution must be applied when evaluating growth opportunities and finding finance to make such opportunities possible.
The following are a few pointers which could assist with gearing up for growth:
Plan your expansion
Without a roadmap for your expansion, it’s easy to get lost along the way — making changes to your business that are either too costly or not well thought out.
During the planning phase, ask yourself:
- What is the real demand for your products or services right now?
- What is the projected demand for them over the next two to five years?
- How big do you need to grow in order to meet that demand?
- How will changing competitor activity affect your business over the next two to five years?
- What should your excess capacity for unusual demands be?
- How many additional staff will be needed and when should they best be employed?
- What’s the best way to phase in the expansion so cash flow isn’t compromised?
- Where can you achieve economies of scale? In other words where will expanding capacity reduce the cost of sales?
hile planned expansion can take a business to a whole new level, over-expansion is one of the biggest dangers of a growth phase. It’s easy to get carried away in the heat of the moment and to expand beyond the needs and the financial capacity of the business.
As a rule of thumb, plan capacity based on a five-year projection of demand and allow an additional 10% of capacity over and above that for periods of heavy demand or for partial down-time in any part of your business. More than this could be very risky and leave a business with overheads it can’t cope with.
Remember, a business may go through several periods of expansion and it’s best to phase these according to demand. Don’t try to account for each and every eventuality during a specific expansion phase.
Get professional financial advice
Whatever the nature of your expansion, there are financial implications for the business and it’s always best to seek professional advice. If you need to build or purchase your own premises, for instance, it’s important to speak to a financial institution that has experience in this area, before applying for finance. Make sure that you do not over- or under borrow from a financier.
For plant and equipment, you may need to consider a flexible financing option, either a loan or a combination of a loan and an equity investment. Again, consulting an institution with experience in the field and in your own industry is essential.
As a wise veteran of business once said, “once the money’s spent, it’s spent – and there’s no going back”. In the life of a business, a major expansion is a bit like buying a house or a car — one of the biggest financial commitments it will ever make.
This is the time to watch the rands and the cents. Decide on what you’re looking for — in terms of property, plant and equipment, office furniture, packaging and the like — and then shop around for the best quality at the best price. This can take a bit of time and attention, but it’s inevitably worth the effort.
The economy is indeed showing signs of recovery and the important point is not to miss the proverbial boat. Planning this trip is however critical or else you could land up in an economic whirlpool with dire consequences.
Compiled by Pierre Mey, Executive General Manager and Head of Mentorship and Consulting Services, Business Partners Ltd.
Business Partners is the leading risk financier of small and medium businesses in South Africa.
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