What should you know about expanding your business?

A lot, actually. But among the most important are financial considerations. With several successful businesses filing for bankruptcy after expanding, it makes sense to know just how much you should invest in or set aside to avoid failure. Here goes…

Overhead costs

Opening a new store or office? Offering another product or service? No matter which of these you take on, know that it’ll have a huge impact on your revenues. For one, you’ll need to divide marketing and advertising expenses among the branches. Second, you’ll have to set aside a budget to market the new product or service. You’ll also have to buy new equipment or machines to increase production. And then, there are the materials or manpower required.

Capital

So, you have money allocated for the expansion. Know that you’ll still have to prepare enough working capital and cash reserve. You may even have to take out credit to ensure a well-funded venture. In line with this, take note that depending too much on profit increase could be risky because you’re not too sure if the investment will become successful in a new location.

Scary, right? Prevent possible failure by reviewing previous and current cash flow, credit lines, on-hand finances and incoming funds—from investors, perhaps. Then, come up with financial projections to evaluate the feasibility of an expansion.

Funding

Speaking of incoming funds, make sure you’ll have several sources. Some of your options include taking out debt and using cash reserves. These are more advisable than relying on anticipated profit increases, which may be delayed or may not come at all if the sales don’t reach the projected figure.

On the other hand, borrowing money will put you through high interest payments and less market value.

If you don’t time an expansion properly, the worst-case scenario is bankruptcy. To avoid possible problems, here are some suggestions:

1. Gradually save up to pay off the costs involved.

2. Know the break-even point.

3. Calculate projected profit from the expansion after paying off the costs.

4. Determine whether the expected profit is worth taking the risk.

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