Imagine: your business is booming, you’re struggling to fulfill all the orders you receive, and you’re ready to take the next step to expand your company. First, congratulations. Second, get ready for the added work that comes with business expansion.
If you’re a small business owner, the scenario above is a good problem to have—but it’s a problem nonetheless. There are many benefits to expansion, but there are also risks. One of the biggest risks to business expansion is the added expenses that come with it.
To help you grow confidently, let’s take a look at a few ways to manage business expansion costs wisely.
Research and Plan Your Expansion First
Before you start expanding your business, you need to invest resources making sure that it’s the right decision. Take the time to conduct market research and calculate important financial metrics such as cost-benefit analysis, projected revenue, and the break-even point. By taking the opportunity to research and plan your expansion before you spend the first dollar, you can mitigate the risks of making a poor investment.
Some questions to consider when planning a possible business expansion include:
- How will you pay for it? If you want to manage the costs of business expansion, you need to know how to finance it. There are different financial effects and potential liabilities based on how you fund your expansion—from exhausting cash reserves to taking out a second business loan, you need a plan for paying for the growth.
- Is the new market viable? Market research is an important step before you’re ready to move forward with an expansion project. One of the most important considerations is whether the market is viable. Is demand growing in the market? Will there be cannibalization?
- Do you have human resource capital? Business growth and expansion will likely require more personnel. Hiring more managers and employees to fulfill the expansion comes with many risks and added expenses. Moreover, if you are opening additional locations, you have to find a way to standardize quality and consistency.
Take a Proactive Approach to Vendor Relationships
After you’ve done your research and planning, the next step with the expansion is to start evaluating your vendor relationships. Vendor relationships are a great place to control costs and mitigate expenses.
During the expansion, take an opportunity to look at your current vendors first. If you decide to use the same vendors or suppliers to assist with the growth, use that increased work to negotiate a better rate.
If you’ve never evaluated your current vendors, now is the perfect time to do that. It’s not uncommon for vendors to become complacent over time. You could be losing revenue from declining quality or poor performance—taking a more proactive approach can help you gain more control.
Additionally, depending on the industry within which you operate, you likely have several options for your vendors or suppliers. Businesses should keep a close eye on their vendors and always look for opportunities to reevaluate the relationship against other providers, especially during an expansion when you are hyperaware of costs.
When vendors compete for your business, you benefit. Even if you’ve worked with vendors for an extended period, it’s worthwhile to price them against other providers—if nothing more than as a negotiation tactic for better rates.
Consolidate and Optimize Your Expenses
Business expansion is expensive—there’s no way around that. However, you can help control costs by optimizing your business expenses.
Start by looking internally at your operating expenses and cost of goods sold (COGS). You might be surprised to find inefficiencies and opportunities to save money for the expansion and the current operations.
One of the most common ways to optimize expenses is to find technology, software, and automated solutions to handle your redundant or manual tasks. Do you physically create invoices and waste resources following up with clients on overdue payments? Maybe an accounting software that automates those tasks could save you time, money, and the headaches of delinquent accounts.
Consolidating and optimizing expenses is more than just looking for ways to improve your small tasks. It could also mean being creative with how you approach your fixed assets such as your building, machinery, or vehicles. Maybe you have unused space in your building that could be rented or subleased to another company.
Choose the Right Funding Solution
As mentioned earlier, determining how you will pay for your growth is a critical decision that affects the costs of your expansion. There are several different ways to fund your expansion, and the choice you make will have a direct and indirect cost to it.
For example, if you decide to take out a business loan to help with the growth, you will have to consider the interest rate attached to that loan and the monthly liabilities that come with that financing. On the other hand, if you decide to take investments from friends, family, or other business investors, the cost could come in the form of yearly dividends or other return terms.
No matter what type of funding you choose, you need to make sure you understand any repayment terms. These terms will vary depending on the funding source and can have a huge impact on the financial responsibilities of the expansion.
If your business is taking a slower approach to its growth strategy or needs a quick financing option, it might be wise to use a small business credit card. A business credit card is much easier to get than a loan, and it can be a useful way to finance small investments. Best of all, many of these small business credit cards offer perks and rewards such as travel miles that can help you cut travel expenses and other costs.
Always Look at Your Costs
If your business is in a position to grow, it’s probably because you’re a good owner—and, as a good owner, you need to take a proactive approach to your costs. Even if you decide against expansion, you should implement tools and processes to help you track and measure your internal expenses, vendor relationships, and financing. These areas can have a direct impact on your bottom line, and they can help you run a more efficient and lucrative company.