What is planning for business expansion?
A growing firm often finds it necessary to
expand the level of its operations. To accomplish this, the
firm might acquire additional fixed assets, such as property, a
plant, and equipment. Often, an expanding business will require
additional personnel. In some cases, a business will expand so
much that buying another existing business might be a desirable
option.
Planning for business expansion includes
anticipating the need for expansion, analyzing
the appropriateness of a capital expenditure or a
loan, securing appropriate financing in a timely
fashion, and implementing the plan. Effective
planning also involves an analysis of your
current assets, debts, and profit levels as well as
a projection of the necessary assets, debts, and
profit potential of your expanded business.
Tip: The tax code provides incentives to business owners to
expand their businesses. Section 179 of the tax code allows
businesses to deduct immediately the full cost of qualifying
machinery and equipment purchased and put into use, subject
to an annual limit.
Why expand your business?
An expanding business offers the potential for numerous
growth opportunities. Employees benefit from business growth
through increased earnings and promotions. Customers benefit
from expanded products and services. Owners benefit through
increased profit potential. When sales and profits increase
dramatically, expansion is often necessary to meet demand (i.e.,
to ensure that existing orders are filled promptly and that new
orders can be accommodated).
How do you manage the growth of a business?
The financial and operational aspects of growth must be balanced
when you expand your business. During a growth phase, for
example, the marketing function of the business may extend
beyond the business’s financial capacity to sustain growth.
There are many factors you should keep in mind when managing
the growth of a business. In general, you should expand only
if your business is already profitable. It makes little sense to
incur additional debt when your cash flow is poor. Furthermore,
profitability makes it easier to obtain the financing necessary for
expansion.
Make sure that the management skills and abilities match the
increasing demands of a growing business. In addition, you
should probably seek assistance from professional advisors
familiar with the unique needs of growing businesses. As
for personal concerns, bear in mind that expansion of your
business will necessitate greater personal involvement and
commitment on your part for a time. Cash flow management is
also absolutely essential to the growth of a business. In general,
a cash flow analysis shows whether your daily operations have
generated enough cash to meet your obligations, and whether
you periodically end up with a positive sum of cash on hand or
with a net drain of cash. It is important to have enough cash on
hand each month to pay the cash obligations of the following
month. Cash flow deficiencies indicate a need to alter plans to
provide more cash. Excessive cash surpluses,
however, may indicate excessive borrowing or
idle money that could be invested in your own
business or elsewhere. There are a number of
techniques for increasing the inflow of cash
and decreasing the outflow of cash.
In what ways can you expand your business?
There are many ways to expand your business.
For instance, you can move to larger offices or
obtain additional property and plants, purchase new machinery
and equipment, hire additional personnel, increase marketing
and advertising efforts, or purchase other existing businesses.
How can you obtain capital for financing your expansion?
To obtain bank financing for your business, you need to
understand the bank’s concerns. To avoid risky investments,
bankers primarily base their loan decisions on the collateral
and equity position of your company, as well as your cash flow,
profitability, and management ability. Bear in mind that because
banks want security (collateral) in case you default on your loan,
it is often easier to borrow money to buy fixed assets (such as
inventory, equipment, and buildings) than it is to borrow money
for marketing expenses or general operating costs.
How do you estimate the costs of expansion?
An important part of growth is the budget, or the allocation of
funds to those activities that will bring about growth. Because
you need to borrow the right amount of money (neither too much
nor too little), it is vital that you estimate the costs of expansion
accurately.
For instance, to properly estimate the cost of a building,
you should have a blueprint created and request bids from
contractors. Discuss how subcontractors will be managed and
paid. Also, make sure that scheduling of the work is made clear
so that the project will be completed in a timely fashion.
In terms of the cost of purchasing new equipment, you should
contact several equipment suppliers to discuss your needs and
their prices. Also, ask about the cost and timing of delivery and
installation. In general, when considering expansion, you’ll need
to project the additional cash needed to support your increased
activities.
What about purchasing another business?
At times, expansion can be accomplished by purchasing another
business. In such a case, the expansion costs equal the costs of
purchasing the business plus the amount of money needed for
improvements and operating expenses. Many industries have
standard rules on how to determine the purchase price of a business. The advantages of buying an existing business include
the following:
- Established product or service
- Established “goodwill”
- Management team in place
- Existing collateral
- Reduced start-up time and cost
How CNB can help
Business expansion is a big step, and having the assistance of
trusted advisors to help navigate your path makes it easier for
you to focus on your business. Our Commercial Services Team is
available to discuss your expansion plan and financing options.
Contact a member of our team today.
Source: ©2016 Broadridge Investor Communication Solutions, Inc. This material provided by Jeffrey Barker.
Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.