Making the decision to grow a business can be a tough one. Often, entrepreneurs think that bigger is better – that the growth of a business is a sign of success. I’d like to suggest that the profitability of a business is much more of an indicator of success than its sheer size.
There is a common idea that once we hit a certain point, growing is the most logical next step. This often follows a business’s first year of actual profit.
A number of months ago I had a client visit me who was in this very situation.
I asked this client to prepare three cash flow projections, including units sold, revenues, direct costs and overhead expenses:
- Projection 1: current business, operating at its current size with its current customers and revenues.
- Projection 2: same sales projection as projection 1, but with the new capital and operating expenses of an expanded business. This makes a simple assumption that on the first day of the new operation, every existing client is retained, but no new clients have yet been acquired to take advantage of the expansion.
- Projection 3: same new capital and operating expense from projection 2, but now with the sales projections that would be required to meet the new financial goals. This version serves to clarify whether the number of sales required to meet the new goals are realistic, and to assess the potential for increased profit following the expansion.
Every scenario will be different. In this scenario, my client discovered that enjoying the fruits of his labour at the company’s current size with some profit would be better than putting the business back in the position of taking on new expenses for the potential of a future return. In the case of other businesses, the exercise may reveal that there is a high potential for profit in the next expansion and that the move might be worthwhile.
In either of these cases, a practical analysis of financial projections allows you to make the best decision possible.
The Halton Region Small Business Centre provides one-on-one consultations to entrepreneurs at various stages of their operating business, including those exploring expansion. If you are considering hiring your first employee, moving to your first or a new commercial location or adding new product or service, call us at 905-825-6000 ext. 7900 to book your free appointment.