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(From the Financial Literacy Blog) – Business growth can be a natural next step for entrepreneurs or company-owners and can be a reflection of success. Expansion can help a company increase profits, attract new customers, and develop new products or services. However, expansion can also be a poor business decision if the timing or justification isn’t well-thought-out. Here are the pros and cons of growing a business:
Pros:
Attracting New Customers
When a business grows, there is an opportunity to reach a new group of customers. This is especially true when a business expansion introduces new products and services. Someone who may not have been interested in a company’s offerings before may be interested in a newly-introduced product. For example, if a florist started selling paintings at their flower shop, they would retain their existing customers and attract new customers interested in art. If the business expands and opens a location in a new area, locals of that area learn about the business and become potential customers.
Increased Output Efficiency
When a business expands successfully, the customer base gets larger––ultimately leading to more demand for their products and services. The more products a business orders from manufacturers, vendors, and suppliers, the bigger the discount is on their order. To incentivize successful business to keep sourcing products from them, suppliers often offer bulk discounts. This means a business owner will be paying less for the products they need and selling more as their company continues to grow.
Diversifying Increases Protection
One of the benefits on expanding a business is diversifying revenue sources. For example, if the florist has all their flowers die because of a frost or drought, the paintings they started selling in their flower shop after expansion could continue to bring in income. The more an expanding business diversifies, the more protected the business may be.
Cons:
Greater Capital Needs
Growing a business comes at a cost––a cost that is often quite expensive. Depending on the rate of growth, a business may need to hire new employees, purchase more equipment, and move into a larger space. While all of these can be beneficial, they can be a negative if the increase in business revenue doesn’t add up to more than the cost of new employees, equipment, and space. Depending on the cost of the expansion, a business owner may need to take out a loan to fund the growth. If the business doesn’t attract more customers and increase its income after expansion, it may be difficult to pay off the loan.
Communication Challenges
When a business grows, owners have more to manage––whether it’s more employees, additional locations, or even the increase in production. With more to manage, owners have limited time and attention to focus on different operational areas. If a business had one employee before expansion, they likely communicated often. After bringing in more employees, there is less time for one-on-one interactions, which can lead to miscommunication.
Potential Quality Decline
An owner whose business grows very quickly may need to delegate management duties or divide workloads between different locations. By delegating work, business owners are giving up some control. Additionally, with rapid growth, production will speed up quickly. Businesses may need to release products before they’re completely ready to keep up with demand, which could lead to a drop in quality. A loss of control or a drop in quality could damage a business’ reputation.
When and When Not To Expand a Business
To ensure a business owner is fully prepared to grow their business, they should weigh the pros and cons of expansion. After that, they should set goals––both short and long-term—and create steps to reach them. Business owners should identify potential risks and solutions to overcome them. When well-thought-out, expansion can help a business grow and thrive for years to come.
If you’re business owner looking to expand, contact your local credit union to learn how they can help.