Last reviewed 11 February 2019
Choosing the way to expand your business can be difficult. In this article, John Davison provides some pointers on how to expand a business and also highlights some of the problems or matters to watch for to ensure the business does not fail.
Cash is king
It is vital to remember that cash is king in any business, but it is especially important when expanding. Cash is often in short supply when expanding as there are more overheads to pay for, staff numbers increase, and more stock is purchased. While the new employees and goods purchased will earn income, the cash coming in arrives weeks — if not months — after the outgoings to pay for the new stock, staff recruitment and overheads. It is, therefore, essential to complete a cash forecast to understand when cash is going to go out and when it is expected to come in. If there is a temporary shortfall, banks can be approached with the business plan, profit forecasts and cash flow estimates to arrange temporary financing. Obtaining a loan without these forecasts is more difficult.
The business also needs to identify ways to reduce cash expenditure and increase income and improve cash flow. For example, bill early. For many businesses, their outstanding receivables can represent a third of their assets. There is no need to wait until the end of the month to bill, bill earlier and introduce terms to prompt early payment such as discounts.
How do you intend to grow?
There are different avenues to growth; successful growth depends upon understanding the risks and advantages of the various options. One tool for managing growth is to use the Ansoff Matrix to aid planning:
Products and services
Market penetration in the lower left quadrant is the lowest risk strategy. This is where you plan to expand sales of existing products in the current market. It is a lower risk, as you know the product and its market. Expansion can be achieved by developing a new marketing strategy, using sales commissions, introducing loyalty schemes to encourage return business, promote products with special offers or promotions. In addition, a business can buy out a competitor to take over its market share. The Boston Matrix (see below) can be used to determine which products are to be promoted.
Product development is slightly riskier as although the market targeted is the same the products differ. Products can be developed by making variants of existing products, or selling them in different ways (different sizes, new packaging, as an add-on to other products). Goods or services can also be developed into new but related products. Improvements can also be made to delivery, by shortening time to market, improving customer service, providing training or maintenance contracts.
Market development is as risky as product development as although the product is known, the markets targeted are new. New markets may be new geographical areas, different age groups or socio-economic groups, or even using different channels (such as internet sales, using brokers or direct sales). Prior to expanding into new markets, it is advisable to undertake some research and use tools such as a PEST or SWOT analysis, the CAGE Distance Framework and undertake a market segmentation analysis to identify how the targeted markets differ from your usual customers.
Diversification is the riskiest strategy as the business is targeting both different customers and different markets. The business has no experience of either the market or the product. This strategy is not often recommended and will usually be followed only where there is a compelling reason for such a significant change in the business.
The Boston Matrix is a tool to classify products to determine which products to promote and which to get rid of.
It should be noted that products often do not fall neatly into one category or another and may be regard as placed partially in more than one category. Also, the lifecycle of a product often sees it move from being a question mark, to a star (or rising star), to cash cow then become a dog.
Question marks are products that often have a high potential for growth but have a low market share, often because they are new or innovative products. These products usually need investment to make them a star, or are to be divested if it appears they are not going to make the grade.
Star products are those that have a high market share and high growth potential. These are the future of the business.
Cash cows are products that no longer have the potential for growth (perhaps because the market has changed or there are more competitors) but still produce a good income. They are not dogs, as there is a good income stream/market share. It has to be considered if there should be investment in the product to improve its growth potential, or whether it should be allowed to generate cash without spending much on product development.
Dogs are products with low market share with low growth or low potential for growth. Dogs need to be either relaunched to make them more attractive or discarded.
Top tips to improve your business
Some tips to help improve your business are as follows.
Analyse costs — do you need to spend the amounts you are spending? Are there cheaper alternatives?
Cash flow management — manage your cash, make sure you have funds to meet your payments and reduce bank fees and interest costs.
Improve cash collections — actively manage your debtors, do you chase customers to ensure they pay you on time? Have you considered invoice discounting or factoring? There is no point in providing services or products if you do not collect payment.
Know your customer — conduct surveys to find out what your customer thinks of your business and products. How can you improve your products? Should you introduce a customer loyalty scheme to get return business?
Research the opposition — what are they doing better than you, where do you need to improve? What do you do better than them, how can you exploit this?
Appreciate employees — happy employees work better for you. Find out what rewards they want (flexible working, bonuses, childcare, etc). Different employees want different things. Encourage employees to engage with the business, make their work interesting, make them want the business to succeed. Make them part of the business using social functions, use their suggestions and actively engage them.
Prove you are an expert, or your product is the best — write blogs about how your product is better than others. Get local publicity in the press and on radio. Ask customers to provide testimonials.
Keep your website up to date — do not lose customers due to a poor web experience. Most customers that visit your website are not yet committed to buying, so you need to convince them. What do your customers expect to see on social media, will they use Facebook, Instagram, or other social media outlets? You need to know to be able to address them and different demographics and age groups use different media. Growth is achieved by going out to get customers rather than passively waiting for them to come to you.
Keep an eye on innovations — what changes will impact your business? How can you adapt to them and take advantage of them? For example, what impact with driverless vehicles have on a delivery company? Do you need to use new channels to reach your customers, through franchise, electronic means or other sales channels?
Annual reviews — you should review your business on a regular basis, at least annually. Did you achieve what you set out to achieve this year? Did you hit your targets? If not, why not? What improvements can be made? If something went wrong, what can be done to prevent it happening again?
The path to business growth is different for each business. Each business needs to decide how it wants to grow. To achieve growth an analysis of the business and its systems, and then a review of successes and failures is vital. Few businesses succeed by accident or through inaction. Growth and success are usually achieved through a proactive approach.