When Is It Safe to Grow Your Business?

When you should invest to grow a business

The truth is that businesses should be looking for growth all the time, but there comes a time when you need to decide if investing will help your business continue growing. For example, a small shop can provide a good income for two people, but staying open later or opening earlier will often mean you need more staff. This will instantly place a cost on your business that may not be recoupable until more customers are aware of the new opening hours.

The same principle works for many more businesses and although the example is for extra staff, it could just as easily be more advertising, buying more stock, a business refurbishment or anything that places new costs with expected increased returns. Any investment needs a base in sound financial planning with realistic projections and an understanding of the returns.

Understanding your Business

Expecting profit margins to remain the same is a common mistake and this is why you should work everything out before committing. You may be operating at 10% profit, but that might drop to 8% when you commit to extra investment in staff or advertising. That could be fine if your revenue increases by 15% as a result, but you need to know what these percentages mean to your business in real terms.

There is no hard and fast rule, but there are certain times when you can be more confident than not about your expansion plans. Those affected by the seasons such as a beachfront bar or a gift shop have the summer and Christmas to look forward to respectively. It should be reasonably safe to take on extra staff or spend more on advertising during this period because it’s reasonable to expect a return. Your business could then retract when the season is over for another year.

Spotting the Trend or Identifying a Fad

Some businesses need to rely on good foresight and inventiveness to expand. How many gyms that once offered cardio kickboxing are now offering Zumba or spin classes? These changes happen because of a change in the trend. There would have been a transitional period where people were undecided whether they wanted to change from one class to another, but gyms that were quick enough to get in on the trend early would attract new customers with just a little advertising.

If your gym owners are good at spotting change early on, they will capitalise every time. The gym example is more likely to be a fad and gym owners will know that their base income will arrive from people simply committing to using their equipment or staying with well-established classes such as Yoga.

Trends are different from fads, because fads tend to come and go, but trends are something you can spot if you analyse your historical data. For example, the gym will increase membership after the New Year because many people make resolutions to lose weight. There would be another increase in membership around May because people want to get in shape for the summer holiday. These trends are specific times of the year that justify extra spend on advertising and recruitment because they are peak periods.

Financing the Growth

Extra investment is difficult if you are unsure about the future or you lack enough historical data to know if the boost in sales is a trend, fad or blip in your figures. Your profit and loss account and you cash flow forecast should include any investment and if you borrow to invest, your repayment schedule should feature too. Borrowing to meet short-term needs can be a bad idea if you are tied into fixed repayments; the kind you get when you take when you accept a loan offer; you have no guarantees your business will be able to maintain payments in the future. A business cash advance repayment schedule links to card sales and only takes a fixed percentage of your revenue as repayment so the amount your business repays lowers when your business slows and increases as your business improves, but it remains at the same percentage of your card sales.