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Every small business eventually comes to a fork in the road on whether to expand its business or keep operating at its current capacity. Expanding a small business at the right time is critical to maintaining its success and financial well-being. If expanding comes too soon, you may find that you do not have the client base or enough money to cover operating costs. If expansion comes too late, your competitor could take your market share.

Here are a few factors to consider when determining the right time to expand your business.

  • Do you have a strong customer base?
  • Has your business been profitable for multiple years with a positive cash flow?
  • Is your team strong enough to support expansion?
  • How and where do you expand?

Customer Base

Knowing your current customer base is important when considering business expansion. If you have properly segmented your different types of customers and you understand how much revenue each segment generates, then you are on the right track. You always want to consider your loyal customer base when making business decisions. Conduct a survey or use a focus group to determine how your customers see and use your business, including how they feel an expansion will affect them.

Business Profitability 

As your business generates revenue, investing those profits into the business becomes paramount to creating a positive cash flow. A positive cash flow makes you more appealing to lenders since you may need additional capital for expansion. Business expansion will require an investment in new technology, personnel, and physical materials like equipment, inventory, and space.

Having a Strong Team

Expanding your business may require your employees to take on new responsibilities. A strong team will not mind doing extra work such as training new staff to support the business expansion.

How and Where to Expand

New Products or Services

Adding new products and services could attract newer customers and increase your business revenue. However, test the products or services among current customers and document their feedback. You could also offer a “limited release” of new products and services.

Target a Niche Market

A particular niche market can develop among current products or services you offer. For example, a specific customer segment or subsegment may purchase certain items. In this case, tailor your marketing messages, subscriptions, products, services, and customer retention efforts to that group specifically. Or you can identify an existing niche market outside your business in the general marketplace. In this case research and survey this group first to ensure your products and services match their demand. You also want to be certain the risk-to-reward ratio works in your favor. Determine if there are enough customers in this niche market to create revenues higher than the money and time necessary to expand into this market.

Explore New Markets

Expanding into a completely new market requires a lot of planning. First, you must canvass a new market to understand its customer base and how it compares to your existing market customers. Are there more or less direct or indirect competitors in this market? Will you be selling your existing products or services as is or will you need to adjust your products or services to the new market?

Factors to Consider for Expansion

Understand Competitors

It is important to understand direct and indirect competitors. Direct competitors provide similar products and services and you both compete for the same market share. For example, Burger King is a direct competitor of McDonalds. Indirect competitors, on the other hand, conduct business in the same industry but you may not compete for the same market shares. For example, Burger King is an indirect competitor of Publix. Both places offer food and have some customer overlap, but they operate and execute differently depending on consumer circumstances. So, determine where competitors operate, whether you have the same customers, and their market share compared to yours.

Expansion Costs

If you have done your homework and have a solid expansion plan, it’s time to determine how you will pay for expansion. Expansion costs will depend on your expansion plan. You may be able to cover expansion costs through existing profits and revenue streams. You may have to look at obtaining lending, which can mean expanding any current credit lines, new loans (equipment, vehicle, Small Business Administration, non-profit lenders), or finding an outside investor. Just be sure to run the numbers first. Utilize forecasting models to determine if you can use internal funds for expansion without jeopardizing the established business model.

For More Information

Visit the Business and Community page on Alabama Extension’s website, www.aces.edu, for more information on entrepreneurship.