In our last issue, we looked at ten simple rules for a successful start-up. Starting a business is the most challenging decision to take, especially when you have been in employment and are used to a monthly salary, however small this might be. In this issue, we look at how to grow your business.
If you have transcended fear of failure and have a business already running, then gear up for growth! Many entrepreneurs become, not as a choice but, as a last resort in life. Such entrepreneurs are just survivalists who will rarely see beyond their immediate situation. Survivalists are hesitant to grow their businesses and optimize their contribution to the economy or create sustainable jobs. However, if your business is offering required and competitive products, there are enough reasons you have gone beyond the start up phase and moving ahead is worth a try.
Entrepreneurs should be looking for ways and means to take advantage of the opportunities the market is offering. The following are a few pointers which could assist with gearing up for growth:
PLAN YOUR EXPANSION
Without a roadmap for your expansion, it’s easy to get lost along the way — making changes to your business that are either too costly or not well thought out. During the planning phase, ask yourself:
• What is the real demand for your products or services
• What is the projected demand for them over the next
two to five years?
• How big do you need to grow in order to meet that
• How will changing competitor activity affect your business over the next two to five years?
• What should your excess capacity for unusual demands be?
• How many additional staff will be needed and when should
they best be employed?
• What’s the best way to phase in the expansion so cash flow isn’t compromised?
• Where can you achieve economies of scale? In other words where will expanding capacity reduce the cost of sales?
While planned expansion can take a business to a whole new level, over-expansion is one of the biggest dangers of a growth phase. It’s easy to get carried away in the heat of the moment and to expand beyond the needs and the financial capacity of the business.
As a rule of thumb, plan capacity based on a five-year projection of demand and allow for a reasonable excess (say 10%) capacity over and above that for periods of heavy demand or for partial down-time in any part of your business. More than this could be very risky and leave a business with overheads it can’t cope with. Remember, a business may go through several periods of expansion and it’s best to phase these according to demand. Don’t try to account for each and every eventuality during a specific expansion phase.
GET PROFESSIONAL FINANCIAL ADVICE
Whatever the nature of your expansion, there are financial implications for the business and it’s always best to seek professional advice. If you need to build or purchase your own premises, for instance, it’s important to speak to a financial institution that has experience in this area, before applying for finance. Make sure that you do not over- or under borrow from a financier.
For plant and equipment, you may need to consider a flexible financing option, either a loan/lease or a combination of a loan/ lease and an equity investment. Again, consulting an institution with experience in the field and in your own industry is essential. It is important to weigh your options on a pure risk return basis, flexibility and affordability.
In the life of a business, a major expansion is a bit like buying a house or a car — one of the biggest financial commitments it will ever make. Decide on what you’re looking for — in terms of property, plant and equipment, office furniture, packaging and the like — and then shop around for the best quality at the best price. This can take a bit of time and attention, but it’s inevitably worth the effort.
Eric Rutabana is the Chief Investment Officer of Business Partners International Rwanda SME Fund, a risk Finance Company for formal SME’s