Opening additional premises is a sure sign of business expansion but is it the right move for your small company? The extra overheads will need to be offset against the expected upturn in business – it’s a delicate balancing act with an opportunity for real grown but also with a risk of it all going pear-shaped.
Before you’re ready for a second business location, you should evaluate the situation carefully and get affirmative answers to these 4 key questions.
1. Is your current location returning a healthy profit?
Use your existing business location as a starting point to see if the financial indicators are showing a good performance. As a rule of thumb, you’re looking for at least 6 months’ consecutive profit generation with a healthy, positive cash flow.
The higher the level of profits achieved, the more confident you can be that the business is doing well and that a geographical expansion won’t put a spanner in the works. However, make sure that you take a longer-term view to allow for seasonally based or other short-term spikes that could distort the picture.
An expansion is often hailed as the way to achieve greater business growth, however, if you’re simply growing revenue by increasing expenses, your added net profit is zero. Success comes from being able to build scalability – making efficiency savings under an increased workload without carrying the same level of costs.
If your existing location is not a profitable venture, it’s doubtful that a second location will solve the problem. Many seasoned entrepreneurs warn against ‘‘making one child sick to save another’.
2. Do you have a robust reason for wanting to expand?
Research insights and hard data should be at the heart of your decision to implement a business expansion involving additional premises. If, say, you’re having to turn away customers because your business simply cannot handle the volume of business demanded, that’s an excellent reason for opening up another location. Similarly, if your research has identified a huge demand for your product/service in a specific location, that’s good confirmation too.
The worst reason for wanting to expand is if the decision is driven by ego. Difficult though this may be to keep apart in your everyday working life, your personal prestige or empire building ambitions should have nothing to do with business realities. Yes, it would look good to have locations in London, Paris and New York, but can the business really sustain this?
3. What’s the plan – innovate or replicate?
Assuming that all performance indicators point towards expanding with a second location being a good idea, what exactly will you be doing there? If the plan is to replicate, you need to have a very good understanding of what exactly makes your current business so commercially successful. It could be your hero product, or menu, or the exceptional level of customer service provided, or a combination of many different things. The trick is to know exactly how to replicate the same experience elsewhere.
Alternatively, you may want to expand the scope of your product/service offering – such as the sandwich shop chain Pret a Manger opening Veggie Pret, a vegetarian branch. In order to diversify successfully, use the lessons learned in your original location and apply the same business management principles to the new location, which should give you an immediate competitive advantage.
4. Is the necessary funding in place?
When it comes to funding, it’s highly advisable to treat your new premises as an entirely separate entity rather than taking money from the first location to help finance the second. The problem with creating a financial dependency between the two premises is increased financial risk for both. If one doesn’t perform, the other will feel the repercussion. The worst case scenario is that you could end up losing both!
Securing funding to get your second place up and running can take two forms. There’s the self-financing option using your own capital, in the case where you are in a position to make large funds available for business purposes. The second option is to take out a loan for small businesses. Make sure you research the market well and speak to your financial adviser to help you get the best deal.
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