To Expand Or Not To Expand? – Determining Your Cost : Benefit Ratio

Your mother clearly dropped you on your head as a child and as a result, you decided that you wanted to be an entrepreneur when you grew up. You took the leap and low and behold the crazy idea you had actually worked out and business is going great but you are at a tipping point where you either need to expand or start turning away business. Sound familiar?

While it’s always tempting to keep welcoming growth and leap into the opportunity to expand it’s not an easy black and white decision. You need to be strategic and know your cost to benefit ratio to ensure the decision to expand will actually be good for your business and not harm your bottom line long term.

Here are 5 things you need to consider when determining if taking the leap makes sense

Can you afford it?

This may seem like an obvious question that is easy to answer but it’s not as simple as it sounds. An expansion, whether it’s of a physical space (ie: retail location) or simply bringing on new team members to manage demand is a money sucker in the beginning.

You need to make sure you can afford any closures, renovation, and new inventory costs as well as any hiring and training costs in addition to your regular operational expenses.

Ideally, you want to have this money saved and only finance the expansion after discussing your numbers in detail with your accountant to confirm the additional costs make sense.

 

Know Your Break-Even Time Frame

How long will it take you to make back the money you spent on expanding? In most cases, expansions don’t happen overnight and increased profits aren’t guaranteed as soon as you open your new door. You need to know how long it will take for you to break even after an expansion so that you can ensure you have enough money saved to cover your increase in ongoing costs in advance.

Know Your Numbers

We say this in every post for a reason – because it’s essential if you want to grow a strong, profitable business and make smart, strategic decisions.  

Without knowing your numbers you can’t accurately and successfully plan an expansion. You need to understand your cash flow projections so that you can create a financial plan designed to help you survive your worst case scenario and a marketing plan to achieve your best case scenario.

Understand Your Target Audience

Don’t rush into an expansion simply because you experience a burst of requests and it feels like demand is there. Research your target audience thoroughly and ensure that the demand is real and ongoing. You may discover that demand is seasonal, much smaller than you anticipated or can be addressed with some extended hours or a few special order requests.  

Making the decision to expand isn’t going to be easy but completing a thorough analysis of the costs, benefits, and demand will ensure that when you make the decision it’s strategic and optimized for success.

If you need help understanding your numbers and determining if an expansion makes sense for you contact Homeroom today!

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