Budgeting for expansion

Expanding your business is exciting because it typically means you’ve been profitable enough so far to justify growth. If you’re looking to expand your business, you want the best possible chances for success. Among the factors you’ll have to consider is your budget. After all, depending on the type of expansion you do, you may need the funds to pay for it.

Here are some things you can do to set yourself up for success when the time comes to expand or scale your business.

Understand your goals

A good place to start is knowing exactly what your goals are. This can be anything from opening a new location to expanding your product lines to entering a new market. Each has its own factors that must be considered, and the costs associated with each will vary.

Understanding your goals will enable you to determine how much money you’ll need to finance your expansion.

Budget for growth

Depending on the scale of your expansion, both your fixed and variable costs are likely to be higher than before your expansion. Make sure you’re prepared to cover these higher costs.

Forecasting your cash flow for expansion is a crucial exercise. Analyze your variable and fixed costs in detail by making sure your forecast includes not only the projected costs for your growth project but the day-to-day running of your business pre- and post-expansion.

You’ll need to know your one-time costs and your ongoing expenses. One-time costs include items such as lease deposits, construction or renovation costs, and purchasing new equipment. Ongoing expenses include employee salaries, rent, inventory, marketing costs, and utilities.  

Forecasting will highlight any potential areas of risk or hidden problems. In addition, if you’re not quite sure about some details of your strategy, running scenarios through your forecasts will help to improve the pace and scope of your plan.

Run a pessimistic, realistic, and optimistic version of your final financial forecast. This will help avoid the temptation to be overly optimistic and demonstrate to potential lenders and investors how carefully you’re thinking about the implications of growing your business. When you identify risks, show how you plan to mitigate or address them. For example, by having enough cash reserves on hand to cover costs for a year.

Get your accountant or financial adviser to confirm what you’ve planned is realistic. Try also to consult experts in the field and business owners with experience in growth – their advice may well help you draw up a more realistic expansion plan and avoid some hidden pitfalls.

Financing your expansion

Depending on the type of business and scale of planned growth, your own operating revenue or cash reserves may cover your costs. This allows for you to proceed without taking on additional debt or selling shares in your business. On the other hand, borrowing money or finding investors may give you a large amount of cash in a lump sum, if that’s what you need.

In terms of external financing, the most obvious option is to discuss plans with your bank and try to secure a loan. If you welcome the idea of having additional skills and experience on hand, you may want to see if you can attract investors as another option.

Some owners seek to raise capital in other ways:

• Crowdfunding can work if there are enough people who are willing to put some money into a business they believe in. You may have to give them something back in exchange for their contribution, so be willing to offer a thank-you gift of some sort.
• Angel investors may be willing to invest their money in your business, especially if it aligns with their expertise and mission. In exchange for their money, they may want a say in how you run your business, so be prepared to seek out their opinion.
• Friends and family may be willing to lend you money to help you grow your business. Be very clear about how much you need, how it will be used, and how you plan to pay them back, so everyone’s expectations are properly managed.   
• Bootstrapping, where you invest your own personal money into the business so as not to put your business’s finances at risk and not take on additional debt. If you don’t need a lot of additional financing, this may be a smart way to go, provided your personal finances are healthy.

If you’re simply scaling your business, you may not need any additional financing for the expansion. Having systems in place that enable you to scale will make the process easier and more efficient. You can scale your business by identifying new customer segments to target, by using technology to boost efficiency, by licensing or franchising your business, or by collaborating with complementary businesses.

Spend time

As in all areas of business, planning and budgeting for expansion requires careful thought and time.

No matter what your financing plan, it makes sense to optimize your cash flow in the lead up to expansion – you want to have cash available for any unforeseen circumstances. Use your expansion as a motivator to tighten up your credit control and spending. You could run your business through a financial health check to ensure you’ve found any issues that need addressing before you launch.

You could also calculate your cash burn rate and your cash zero rate so you have some timeframes in mind for achieving a positive cash flow after expansion.

Next steps

By taking the time to strategize you can set your business up for success during an expansion. Whether you expand or scale, it’s a great idea to take a look at your finances and make decisions that protect your finances and are guided by a realistic view of your expansion plans. Forecast your cashflow, make sure you have a budget for growth, and talk to a professional with knowledge in your industry so you can anticipate obstacles.