3 financial considerations of a business expansion
Business expansion written on a piece of paper.
Expanding your business is as essential to its success. However, to make this happen, you must consider many financial factors.
Without calculating the resources that you need, you might draw up fewer or more loans than you should have. Consider the following financial aspects when expanding your business:
1. Working capital
Working capital means the total finances left after all current liabilities have been paid via your current assets. Current liabilities refer to your short-term debt, accounts payable, and other obligations due within a year. Meanwhile, current assets include ones that you can quickly convert to cash, and they’re short-term, such as your inventory and accounts receivable.
Sometimes, people use working capital to refer to the financing needs of their business, such as real estate working capital, to get funding for a marketing budget. You can also apply for a working capital loan if you need the following to expand your business:
- Seasonal inventory: Having enough stock on hand is essential when you’re expanding your business. Although you can’t predict what could happen in the coming year, you must still prepare as consumer buying habits could change. Or check your inventory tracking data to gauge how many stocks you need. Of course, working capital lets you get the correct number of stocks to stay in the game.
- Digital transformations: While in-person transactions are still in play, you may also need to cater to consumers clamoring for digital touchpoints. This transformation can also expand your broader operations to wider markets and improve customer service interactions. However, you need funds to secure digital and technical solutions like fulfilment platforms, e-commerce software, and other cloud-based services.
- Marketing: When expanding, you need to showcase your business more. It means letting the market know about your differentiators and offerings while building brand recognition and equity. You can do all these by engaging in various marketing endeavors. If you’re in the real estate industry, you need to consider different real estate funding methods to get a working capital loan.
2. Manufacturing and overhead costs
Network of outlets. Franchise concept. Woman holding a phone
Another financial consideration is the overhead costs, which can affect your margins differently. You’ll also have different economies of scale in making and selling your products if you’re expanding to open a new location or add a new service or product. For instance, you’ll split your marketing budget between two locations if your expansion involves opening a new location.
You’ll also need two different marketing efforts when launching a second business or adding a new product. You may even need a new production facility if you’re expanding by launching a new product. This requirement is necessary if you want to increase your sales.
3. Pricing
Your business’ success will rely on your sales, which means you need to have the right pricing strategy. Your product or service’s price will directly impact the success of your business expansion, no matter what type of product you’re selling. That’s why it’s best to consider the basic rules of pricing:
- Assure sales with the prices you establish
- Regularly review prices to reflect profit objectives and respond to the competition, market demand, and cost dynamics.
- Lower costs if you want to effectively lower prices
- Remember to cover profit and expenses with the prices.
Even if your business is booming initially, your expansion may fail if you exhaust your financial resources. That’s why you must always price your service or product to make your cash flow positive by covering costs, which is part of the right way to handle your finances. With such, you must know the costs of running your business before you set a price for your product or service.
When determining the costs to expand a business, you must include the following:
- Desired profit to the operating expenses
- Cost of goods sold
- Team member discounts
- Damaged merchandise
- Shortages
- Markdowns
- Commissions
- Wages or salaries
- Financing costs
- Utilities
- Inventory
- Loan repayments
- Equipment or property leases
Most importantly, you shouldn’t forget your profit when calculating your costs. As you don’t want to simply break even, treat gain like a payroll, loan payment, or fixed expense. Don’t settle for ‘hoping for the best’ as that wouldn’t be the best decision in any business. Instead, conduct market research even if it requires time and effort. That way, you can maximize your profit as well.
Conclusion
Although there are other financial considerations of a business expansion, the ones mentioned above are the most common. Start with your working capital, then consider your new overhead, manufacturing costs, and pricing. When you know how much of these are in your finances, you’ll know whether to go for financing options.
