How to budget for expansion.
Good research and planning can help to put the process of expansion in perspective. Here’s an overview of the key points to consider when expanding your business.
Weigh up your decision.
You may want to target other markets, diversify into a new product, open in another location, franchise your business, acquire another business, or expand online or globally.
Expanding a business is a major undertaking and requires serious consideration. Growth exposes a business to risk, but careful planning can help to reduce this. For your plan to be workable, you’ll need to have a clear idea of what you’re hoping to achieve and on what timescale. Be hard on yourself here – what’s your reason for choosing these particular goals? Is there a more logical route to take?
Make a plan
Once you’ve settled on a strategy, break your plan down into specific, measurable goals. You’ll need a business plan to help you present your business case to potential investors or lenders in a credible way. You can download a business plan template from the business.govt.nz website.
Forecast and budget for growth.
Your expansion plans should take into account the economies of scale relevant to your situation – factors that can reduce the cost of production as you make more of the product.
Depending on the scale of your expansion, both your fixed and variable costs are likely to be higher. You’ll need to make sure you’re getting the balance right – will you be able to cover these higher costs?
- Forecasting your cash flow for expansion is crucial. You can read about cash flow forecasting on the business.govt.nz website and download Westpac’s free cash flow forecast1
- Analyse your variable and fixed costs in detail. Feed your projected costs for the duration of the expansion into a forecast. Have a look at what happens to your cash flow if you have more staff or higher overheads and what extra revenue you expect to bring in
- Ensure you’ll be able to cover any large expenses incurred while expanding – for instance, purchasing new equipment
- You also need to know that your new, larger business will be able to stay profitable day-to-day. This will involve forecasting for the day-to-day running of the business post-expansion.
Forecasting can help to 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 focus the pace and scope of your plan.
- Run pessimistic, realistic, and optimistic financial forecasts of your final plans. This will help avoid the temptation to be overly optimistic, and demonstrates to potential lenders and investors how carefully you’re thinking about the implications of growing your business
- Run your forecast figures past your accountant and confirm your figures are realistic
- Consult experts in the field and business owners with experience of growth – their advice may well help you draw up a more realistic expansion plan and avoid some hidden pitfalls.
Consider your financing options.
Depending on the type of business and the scale of planned growth, bootstrapping – using your own operating revenue – may cover it. This means you proceed without lenders, but it does expose your business to financial risk. However, as the funds for expansion won’t come in one large injection, it does place limits on the pace at which the business can grow.
For external financing, be aware that any lender you work with will want to be confident that you can manage your own expansion.
You can discuss plans with your bank manager and try to secure a loan. Check out Westpac’s business loans, which can provide a flexible, medium to long-term financing option to help you grow your business.
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.
There are pros and cons to every type of financing, so make sure you do your homework. Westpac’s Debt Capital Markets management team can advise you on how to raise capital. You can also visit the business.govt.nz website for advice on finding sources of capital.
Your home loan as capital
If you have your business banking and your home loan with one bank, your mortgage can be a source of funds. Your home loan is one of the cheapest forms of capital, as the interest on a home loan is lower than that on overdrafts and credit cards. Topping up your mortgage or reducing your payments are just some of the ways to increase your cash flow. Talk to Westpac about managing your home loan.
No matter what your financing plan, it makes sense to invest time in optimising your cash flow in the lead up to expansion – you’ll need as much cash on hand as possible for any unforeseen issues. If you feel there’s room to improve in this area, use your expansion as a motivator to tighten up your credit control and spending.
Be aware that as you expand your business, you may have new tax obligations that did not apply when you first started out. Visit Inland Revenue’s website for information on this.
Things you should know.
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