How to successfully grow your business
Most business owners have plans to grow and expand to increase profitability and value. This may seem like an easy process, but there are a number of pitfalls that should be avoided to insure that the expansion is indeed successful and that business growth is accomplished while maintaining profitability. Making decisions about how to finance growth – through a line of credit, or through internal financing – is just of the things to consider before making the leap to growth.
Steve LeFever, Chairman of Profit Mastery, wrote an article (below) with indispensable and timeless advice on this subject that is so critical to business success.
Expanding? Prepare before you leap…
Are you a business owner who’s dreaming of growing your business, expanding into a larger space, or purchasing your own land and building?
Go for your dream, but be sure to do it wisely. If you are thinking of using your unused line of credit to pay for renovations, stop right there! Please don’t violate the number one rule of borrowing, which is: match the life of the loan to the life of the assets. A credit line is short-term debt, designed to be used for working capital needs such as seasonal inventory, and ideally paid down to zero for at least 30 days a year. Renovations and expansions are long-term, capital investments, for which you need a term loan, which can be paid back over a longer period of time. Chances are you’ll need every bit and more of your credit line for inventory and other unplanned expenses.
To get a term loan, you’d be wise to put together a solid plan, including financial forecasts for your new operations. And if you are thinking of buying a piece of property, or an existing building, for a new or additional location, you will actually be going from not one but three new businesses.
First, there’s a real estate project, which might be owned by the business or owned by the owners of the business and leased to the business.
Second, there’s the relocation and most likely expansion of your actual business operations.
Third, there are the future operations of the property itself.
Each one needs its own set of forecasts that will allow you to project how much money you will need to borrow, and how and when you will pay it back. (Financing sources are understandably very interested in this part.)
To do the real estate development forecast, you’ll need to be in close contact with your architect and contractor. It will include preconstruction fees such as permit fees, surveys, architect fees; construction fees such as prep work, utilities, slabs, roof framing, electrical, etc. plus allowance for the dreaded “change orders.”
To create projections of your actual business operations, you’ll need to be in close contact with your accounting professional. You’ll want at least two sets of monthly projections: a projected income statement or profit plan, and a cash budget. The cash budget will show your best guess as to what cash is coming in from sales and what cash is going out to pay expenses, including principal payments and interest back to the bank. Why is it important to have both? Because while your monthly profit plan may show an ending positive profit, your ending cash may show a negative cash situation. And cash, as they say in the financial biz, is king.
And, for each of these, you’ll likely want at least three different scenarios based on best case to worst-case projections of sales and expenses.
Your building operations will be a profit plan on your building, showing projected revenue from rent and common area reimbursement and expenses going out for property taxes, management fees, utilities, and reserve replacement.
If all this sounds a bit overwhelming, just remember business success does not have to happen all at once and you don’t have to do it alone. Besides enlisting your accountant and builder, there’s a wonderful resource out there for you – the Small Business Development Center, or SBDC. It’s very likely that there is an office located near you. The SBDC offers no-charge professional advice to small business owners. The counselors are extremely competent, and are often former business owners themselves. In Washington State, for example, you’ll find a local counselor by typing in www.wsbdc.org. If they are in another state, use Google or other search engine. For example: “SBDC Denver” immediately brings up an entry for the local office there. SBDC counselors have Excel worksheets and samples of projections and business plans. They can also help with market research and direct you to the right funding sources depending upon your need.
Follow your dreams for business success, but be prepared. If the thought of doing all this “what if” has you paralyzed, just remember that the one thing we do know for sure when we make projections: You are indeed bound to be wrong in some way! However, a best (educated) guess, with professional input, is your best hedge against the future unknown.