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When To Expand Your Company
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Business New Haven
11/12/2001
By: Michael C. Bingham
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No entrepreneur we've ever met dreams of contracting his or her company. “Grow or die” has long been the mantra of American businesses.
That's a fine principle. But since few companies can sustain willy-nilly growth over a long period, rational business expansion typically takes place in carefully planned stages.
“Expanding” your business may mean any number of actions: Enhancing your workforce. Moving to new, larger quarters. Introducing a new product or service. Upgrading your company's technologies. Investing in capital equipment needs.
In truth, upgrading equipment and/or production technologies is one of the most common reasons business owners seek outside financing. But more isn't necessarily merrier when it comes to capital expenditures. Will adding new equipment introduce economies into your business that exceed the cost of the increased overhead stemming from the purchase? This equation can be slippery to calculate with precision.
As a bankers' rule of thumb, most companies' ability to self-finance expansion extends to approximately a 15- to 20-percent annual growth rate. Beyond that, most business owners discover that they must seek outside financial resources to climb the next step.
“Restructuring” a business has become an unwelcome euphemism for reducing headcount. But expanding a business by more than small increments involves literally altering and refining the structures and functions of your organization.
Let's say that demand for your product or service begins to exceed your ability to produce or deliver it (lucky you). What are the obvious incremental options? Overtime, adding second or even third shifts, outsourcing or subcontracting particular production items or components.
If any or all of those tactics are still insufficient to meet your production needs, you may need to revisit your fundamental business processes.
A useful way to approach this process is to sit down with your most trusted outside advisors - your commercial banker, your accountant, perhaps your lawyer. (The two key words here are “trusted” and “outside.”) They are better positioned than you to see the forest for the trees, and may help spotlight one or more of the blind spots all business owners have. As well, they are likely to have encountered circumstances similar to your in the past, and can draw on that reservoir of experience.
Many entrepreneurs are individuals with a particular skill that has been honed while working for someone else. Over time, the individual comes to believe he can perform the skill better on his own. If he's right he or she will succeed - to a point. Moving past that point and building true business success depends more on experience than intuition. That's why it's so important to seek and really listen to outside counsel. Nine times out of ten, they seen business people in your shoes before.
So demand for what your company produces is outpacing your ability to create it. But what about next week, next month, next year? No one we know in business has a crystal ball. Nevertheless, it is imperative to sit down with a number of key customers and have a frank discussion about how they view their future needs for what you provide them.
And that “number” of key customers should certainly be a number greater than one. Indeed, any prudent business owner ought to think twice about fundamentally altering his or her organization if a single customer represents more than about 15 to 20 percent of total sales each year. Given that you can't possibly know what that customer's own business prospects really are, such a client mix is dangerously top-heavy.
A better reason to plot a major or fundamental expansion is when the opportunity arises to move your company into a more diversified - and hence more recession-proof - product mix. If the biggest companies make more than one product, it stands to reason that companies that make more than one product are most likely to grow the largest.
Obviously, and with a nod to Tom Peters, it's important to “stick to the knitting” and set your sights on diversifying only into lines that you know will be compatible with what your company makes and how it functions day-to-day.
So your business is growing beyond your ability to manage its growth. The first thing you should do is to reach around and pat yourself on the back - for two reasons: One, you're obviously doing something right; and two, you're smart enough to recognize your own limitations. Growing sustainable business success is almost always a team enterprise. That's why now is the most important time to be a good team player - as team captains nearly always are.
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