May 2013

Expand your business carefully

Businesses grow in stages, and often that growth is linear. Year-to-year profits expand incrementally as new products are developed and new services offered. Sometimes, however, a company will want to seize new opportunities and expand rapidly. Perhaps a competitor drops from the market and your firm is suddenly faced with a new client base. Perhaps an improving economy makes opening new stores in another region a viable option. Perhaps a vendor that supplies one of your company's key components has started searching for a buyer.

Proceed with caution! Although rapid expansion may provide opportunities for increased profitability, growth is also fraught with hazards. Not a few companies have crashed and burned because they plunged into new markets or acquired existing businesses without adequate forethought. If your company is mulling over expansion, consider the following:

Know your priorities. A firm should never lose sight of its core mission. Be slow to expand into products that, on the surface, seem similar but may actually take your firm in a different direction. If your company manufactures furniture, should you really buy a firm that produces airplane parts?

Know your investors. Some companies have established hand-shake agreements with investors, then spent thousands of dollars only to learn that financing was not forthcoming. Make sure you have adequate recourse should needed funds fail to materialize.

Partner wisely. For example, seek other firms that can assist with larger-than-expected orders. To prevent backlogs and problems with quality, scrutinize the capacity of your suppliers.

Acquire carefully. If in doubt about any aspect of the business you're considering for acquisition, seek expert advice. "Winging it" is a sure recipe for disaster.

Plan for growth. Many aspects of your business may be affected by expansion, including accounting systems, organizational structure, inventory management, and sales. Be sure to examine every major system and function to determine how they can be integrated into a larger entity.

Monitor growth. As your business expands, always keep a watchful eye on your firm's financial status and progress. Don't wait until the end of the quarter to discover that cash flow has dried up.

Keep existing customers happy. A popular restaurant, for example, that expands too rapidly and fails to maintain quality may find itself losing customers to the eatery across the street. Remember, it's generally harder to attract customers than to keep them.