The Dangers of Expansion
Even some university-level business lecturers dogmatically insist that “growth is good.” This flies in the face of all evidence: while more assets and greater revenues are generally good things, they are often accompanied by unwanted and unexpected guests.
Any business plan should be realistic as far as growth prospects are concerned, outlining what can be expected and what steps can and should be taken. The objective is not growth at all costs – which may be huge – but growth that’s sustainable.
Fixed Cost Flood
Let’s imagine that on Monday, you’re operating one branch in town, paying $20,000 on rent, staff, etc, getting $30,000 in gross revenue, and clearing $10,000 per month. That’s pretty good.
Now, let’s say that you expand by opening another store on Tuesday. In your fantasy, you might have expected all the numbers mentioned to instantly double, in which case your profit would jump to $20,000. What will actually happen is that your fixed costs will approximately double and stay at that level, while revenue from the new branch will initially be zero. You’ll be locked into this for a while, as leases and employees are not always cheap to get rid of. You’re now losing $10,000 a month, which has to be financed out of reserves, credit or investment, each of which brings with it its own set of problems.
Of course, this doesn’t apply to a business which is capable of gradual expansion, so there’s much to be said for scalable businesses.
Several world-famous businesses started off small, producing top-class products in some niche market, and, once they were ready, broke out globally on the back of a strong brand which is universally recognized today. But, what if Nike’s first globally marketed running shoe broke people’s ankles? Or if they accepted more orders for it than they could deliver?
Any expansion will probably bring about changes in staff (who have to be trained) and suppliers (who may have trouble meeting higher demand). If the time you take to fill orders suddenly doubles, or your level of customer service declines, you may lose two customers for every one you gain.
Ballooning Debtors Ledger
You may be operationally ready to shift from being a retailer, to selling to retailers, but this might not be a good idea just yet. Other companies have their own cash flow to worry about and will demand expect terms of 30 to 90 days, during which time you will have to grind along without the money from sales you’ve already made. On paper, it’s an asset, but until the check clears you can’t completely rely on it.
You and your team may be great at handling whatever comes up as things stand, but increased complexity also means that management becomes more complicated. If you want to start exporting, do you really know all you need to about the numerous export and import regulations, how letters of credit work, and a thousand other things? A larger company is more visible to tax and regulatory authorities, as well as sometimes having to comply with different rules, so not having clarity on this can be a huge risk.