Revised September, 2019.
Growth is good. With success, there usually is an increase in financial fortunes for owners and employees alike. Success of the project or venture validates the initial concept and the ingenuity, sacrifice and hard work of those involved.
Growth is a natural stage of any business or project’s evolution and the success of its product. We discuss this elsewhere on AgMRC where we consider the inevitable “stages” of a business or product lifecycle. Growth is a perilous phase for any business. Like the “rain-cloaked tornado” where a twister forms behind the dark front of an oncoming thunderstorm, business perils often are cloaked by the pace of change and the changing opportunities, contacts and decisions that preoccupy owners and managers.
Some owners may adopt a philosophy of limited or slow growth; this does not mean refusing to change or remain profitable if the emphasis is on increased efficiency or better product or service delivery. Ways to limit growth, but stay in the game, widely vary depending on the venture. Small-service businesses can, once they have a core client base, simply turning down new business. Others may keep their operation and workload structured as it is, but keep pace with rising costs by raising their prices.
This is fine as long the venture is able to remain competitive in the marketplace. This may work for niche markets and some service businesses, but for most product-based companies, economies of scale and scope, perhaps resulting from a changing market or competitor’s expansion, will eventually pressure the operation. In general, what you think is healthy growth may not be the reality of the situation. If you are in a strong industry and your growth rate is less than the industry's growth rate; you are losing ground. If the cost of sales increases as you expand, but sales revenue is growing much slower; you are growing too fast.
Safe, successful, meaningful, profitable, long-term growth, results from effective planning and change management. We discuss the importance of developing business- and financial-planning documents, these are critically important tools when growth requires, internal restructuring and staff changes, potential acquisitions, additional capital requirements and similar actions.
Most small companies incrementally increase their business to “grow into change.” This is a natural growth process where the company increases product sales into new markets, inventory diversity or service range and delivery, without drastic up-front changes to the existing infrastructure. Usually, this is fine to a certain point; however, eventually, the reality of economies of scale and scope and product lifecycle, are no longer in harmony with the pace of growth and will begin to dictate change.
At this point, the business has several paths by which to address the company or project’s needs. One path may be to work with a distributor or dealer. If a relationship is in place, perhaps rethinking or designing more mutually beneficial agreements with distributors or dealer networks is an option. A small operation may want to enter into a strategic partnership with a related supplier or producer, or join an industry or commodity cooperative to achieve savings in common areas of operation (purchasing, distribution, shipping), or outreach (marketing, advertising, lobbying).
If going it alone, perhaps new marketing and communication strategies can be targeted to broaden an audience or reach a new one. Growth can come through the acquisition of another existing business, a competitor (lateral integration) or a supplier or distributor (vertical integration). Usually, the acquisitions are smaller than the parent company, but there are exceptions to this; it all depends on how and to what extent the participating ventures are capitalized. If the growing company is a food or service business, offering franchise ownership to other entrepreneurs is a well-worn path to increased sales, sales demographic, geographic footprint, and brand awareness and identification. If a company owns intellectual property or requires it, it should consider the pros and cons of licensing third-party intellectual property.
Obtaining expansion capital can be difficult; however, if financial planning is a focus of both the business- and strategic-financial plan, the process will help to define advantageous terms and conditions under which to pursue additional funding, consider public or private sources, and develop an actionable timeline. The financial plan should point the way forward to address any financial challenge. Expansion capital can be created through public stock offerings, pitches to angel-investor and venture-capital groups, state and federal grants and incentives. Be aware of the fact that any additional capital will, create new responsibilities to shareholders, investors, and institutional lenders and require updated or increased financial reporting, outside auditing, and perhaps even more forward-looking financial planning.
Planning for growth can be fun and interesting, make it so. You are planning to move your operation to a new and exciting level. To do this, the business needs the financial support from increased sales or expansion capital. Again, this is where a professional business plan that outlines the cost, spending and timeline of expansion, is critical.
That plan should have a concise executive summary that, in one or two paragraphs, clearly states the goals, history and to-date success of the business. It should then go on to cover the expansion: goals, strategy and milestone objectives of the expansion; and list needed changes to facilities, equipment and staff. The executive summary should take no more than two pages of the business or financial plan; and ideally, one. The executive summary is frequently used as a stand-alone meeting and briefing paper. Before you take this, and the rest of your business or financial plan out into the world, have it reviewed by a competent copy editor or technical author (technical writer) familiar with these types of documents. They can be found by searching the Internet or contact or visit the membership directory of The Society for Technical Communication.
In the body of the plan describe your target market by demographic, such as age, gender and socioeconomic status, and discuss your current marketing tactics; outline changes. Then discuss where your business fits into the market landscape with respect to your competition. Elaborate on how your service or product expansion will result in greater market share. Understand your market and the reasonable expected market share captured through the expansion, the value/profit of that market share and the costs associated with attaining it.
Other sections should provide business net worth, and monthly, quarterly and yearly profit and expense information with notes on any seasonal demand and similar sales fluctuations, should they exist. Discuss the current management team, as well as, new partners or key staff. Include an appendix for letters of support, blueprints or permits.
So, how does one go about planning the plan and creating the document? It all starts with a self-evaluation tool that can identify your strengths and weaknesses, and key markets or types of future market opportunities. Elsewhere on the Internet one can find various models; these include, SWOT, PEST, Lafley & Martin, SOAR, TOWS, Porter’s 5-Step and many variations on these themes. Take a few minutes to check them out and consider the best fit for your expansion.
SWOT (Strengths, Weaknesses, Opportunities and Threats) is a great planning tool and one of the easiest with which to work. There are many ready-to-use public domains templates available in business how-to books and on the Internet.
Once the SWOT or similar exercise is completed, the result will raise a set of issues and questions. At this point, management, hopefully with employee input, will undertake discussions about how to best develop the structures and processes that will further enhance the organization's core capabilities. These need to identified, prioritized, and have a budget and an implementation timeline developed for them. This needs to be dropped into a three- to five-year financial plan template (-many examples are out there).
The final document should be reviewed by key employees and advisors. The financial projections should be reviewed by a tax professional to consider equipment purchase costs, depreciation tactics, sale values; and full- or part-time and contractor employee issues. His/her advice on depreciation planning and similar cost-effective money-management strategies should be summarized and included in the plan. At this point, your long-range planning and your business- and/or-financial plan is complete. It should be reviewed and amended as needed.
One grows a business and its profits with increased capital through increased sales or investment; but a business also needs advisors to consult and mentor as the process goes forward. When you move forward, you may be placing your project in the hands of an architect or builder. Be sure to review their portfolios and client satisfaction to find the best choices for your project. Go over your business plan with them and accordingly adjust your timeline(s) and financial projections.
Please do not forget that purchasing corporate property or other real estate, developing articles of incorporation, permitting, liability and other human-resource issues all should include another class of professionals: lawyers. Take the time to find and retain the most experienced individual for the task at hand. The proper lawyer versed in the proper discipline is what you want for a particular task. Too many businesses have run into trouble down the road because they used the family friend who is a divorce attorney to review a corporate or liability issue. Various legal on-line directories are available to help you find the right specialist.
If you are going to seek financing for your expansion, analyze your financial situation to see if you have adequate funds to start your expansion. Be sure to visit your local SBA (Small Business Administration) office. SBA is committed to helping small businesses thrive and has financial programs that address the various needs unique to various ventures. Find your local professional and set up an appointment. They are there to help you. Any consultation will be well worth your time.
So, your company is expanding. Growth is change, and change always brings along its own bag of problems. Greater production means increased logistical headaches. As production grows, so too must all of the inventory support, shipping and personnel needed to support it. Increased capital, for example, from a stock offering, will mean increased ownership, accounting and financial accountability issues. If there has been a merger or acquisition, or simply added employees, there may be issues with long-standing employees not wanting to yield to the newcomers. The newcomers may face alienation. Rapid growth, adding new technology, or moving to a different location can result in service interruptions or product-quality issues. All of these issues can be successfully addressed, but that requires competent management and open communication.
Growth will drive change within the organization. By necessity, the first engagement needs to be a review of the management structure and decision-making process. Increased workload and not-in-the-job-description expanded-management duties usually are issues with every expansion. Engaged employees and management, communicating about potential problems, can anticipate problems and have contingencies in place to deal with them.
For more information:
Expansion Financing from Entrepreneur.com.
Prepare a Business Plan for Growth
Primer on small-business expansion from Reference for Business
Seven key Steps To a Growth Strategy That Works Immediately
Writing a Business Plan: Choosing a Growth Strategy