Written by Justin Song, a senior research analyst at LendingTree where he has experience covering topics such as personal loans and small business lending.
Making smart decisions for your company is both your privilege and responsibility as a business owner. Chances are, when everything is running smoothly, you still see room for growth and want to explore how you can do so with as little risk to your current processes as possible. Knowing when to be in growth mode and when to hold back is a skill you develop as you become a seasoned entrepreneur. Below are some items to consider when deciding if an expansion if worthwhile.
1. Do you have enough cash?
One problem with many businesses is that they are cash poor. Even if business is booming, if you’re over-extended to business creditors and your debt payments are eating into your cash reserves, then you could be headed into the red even as sales soar.
You definitely don’t want this to happen to you, but there are usually ways to correct this course. First, lower your fixed expenses wherever possible. Do you need a fancy office, or can you get into a cheaper lease somewhere else?
Next, examine your debt: Are you paying too much interest? Is your debt negatively impacting your credit score to the point that you might be denied funding in the future (for reference, a credit score of 660 and above will give you the best chance to qualify for a loan).
Make sure you compare business loan terms before taking on any new business debt. Also, be sure to collect on any outstanding invoices. Consider shortening your due dates to a net-30 or net-15 to make sure you have more cash on hand.
2. Where in the business lifecycle are you?
Businesses often grow on an S-curve and there are three general stages of development—startup, midsize and full grown. Within these stages, you can group companies in different categories based on the number of employees, revenue or both. In between growth stages can be the most challenging time for expansion — say when a company is moving from three to eight employees. Another key growth stage is moving from a company of 12 to 40 employees.
These changes represent such fundamental shifts in how companies operate that business leaders often can’t navigate the challenges. So, before you start growing, you need to consider the size of your company, where you are in the life cycle, and how you’re going to efficiently get from point A to point B without suffering in between.
Perhaps most important of all, as your organization grows to each new stage in the life cycle, it’s your job as a leader to communicate those changes to everyone inside the organization, which can be more difficult to do the more employees you have Data show that 45.6 percent of employees ignore emails at work, so make sure before you start growing that you have a scalable communications plan in place to take all your employees along for the ride with you.
3. Can you handle new business costs?
Do you foresee new costs that you’ll have to budget for? Think about overhead costs such as salaries and office space as well as any regulatory costs for new markets or the cost of research and development of a new product.
Because you don’t want to burn through your cash while trying to grow your business, you need to handle the expense considerations of scaling carefully. Improve your processes to shorten the cycle of your business so that you can make cash faster. If it normally takes you two months to find a prospect, land a customer, invoice, and collect payment, look at every step along the way and try to find ways to shorten each time period.
Doing this will help you have more cash on hand at any given time so that you can handle the expenses of growth. You’ll need to grow with your industry, which is why you can get really left behind if you find yourself in a position in which your competitors can handle the cost of pursuing new business opportunities and you can’t.