Deciding whether to grow your business can be one of the most important steps for an entrepreneur. Do you expand and risk compromising your business? Or do you perfect your product or service instead? Expanding a business means higher investments for rent, employees, and inventory. However, it also means a potential increase in revenue and returns. Researching and planning the growth of your business is vital. To make your business growth successful, it needs to be sustainable. Take a look at some advantages and disadvantages of expanding a business.
When is the Right Time to Expand?
A business owner can have several reasons for going towards expanding a business. However, it generally happens when a business needs to generate more profit. Other reasons for expansion are:
- Expansion to overcome problems, such as responding to increasing competition.
- Seeking the benefits of expanding a business due to success and having the money and profits to support growth.
- Taking into account the advantages of expanding a business internationally.
Business expansion might entail:
- Adding employees and franchises
- Increasing marketing efforts
- Forming an alliance
- Offering new products or services
- Merging with another business
- Acquiring another business
- Expanding online
A business owner should consider that growth can affect every aspect of their business, like the staff, resources, and finances. Therefore, considering the disadvantages is as important as the advantages.
What Else to Take into Account When Expanding a Business?
Before you make a final decision, take a look at your financial data. Consider business consulting if you need help in this area. The following will be indicative of your business being on a growth path and whether it is the right time to expand a business:
- The products or services of your business are increasingly in demand
- Your profits have been consistently strong
- Your costs are consistently under control
- You have the available resources
- You have external investors
Where to Expand—Small Business Investment Opportunities in Pennsylvania
There are always opportunities for small businesses to expand. Take into account different options to explore, and don’t settle for less. Pennsylvania, and more specifically Philadelphia, is an excellent source of investment opportunities. The city’s low tax rate, easy access to capital, and many excellent schools and universities make it one of the best small business investment opportunities in Pennsylvania. If you are in the tourism industry, sports, fashion, or education, you are at the right place. All of these industries are thriving in the state of Pennsylvania and may be perfect for your small business expansion.
Advantages of Expanding a Business
Economies of Scale
Economies of scale are particularly evident in manufacturing operations. Larger productions can increase productivity and lower costs for materials, shipping, energy, and labor. If a business makes products, the more they produce, the lower their costs are. Therefore, you can achieve more significant economies of scale when you expand. Whatever product your business is making, you’ll need to make more of it. Consequently, you start buying ingredients in larger quantities, which will, in turn, reduce the final cost of goods. By doing so, you can increase sales and improve the profit potential.
Improving Brand Recognition and Attracting New Customers
Expanding a business can give you the ability to attract and retain new customers. Adding new products can help you tap into new markets. Attracting new customers is one advantage, but becoming loyal long-term is crucial. Therefore, growing a customer base and turning them into loyal customers is the best way to achieve steady and rising profits over time.
Buying in bulk or reducing marketing expenses by spreading the cost of promotion over larger sales can lead to discounts.
Increase Protection by Diversifying
Entering new markets or introducing new products means that if one part of your business is exposed to market changes, you can depend on other income sources.
Disadvantages of Expanding a Business
Making an Investment
Growth is expensive, and it comes with its own set of business challenges. Before you see the positive return on the investment, you will need to make a substantial investment. This will go into opening new stores, investing in equipment, and hiring more staff. Perhaps your business has already reached financial stability with your current activities, and your lifestyle is satisfactory. If this is the case, think twice about sustaining additional risk for business expansion that you might not necessarily need.
Loss of Control and Compromised Quality
If you’re used to running everything and controlling your brand, it might be challenging to let go of that and delegate responsibilities. Expanding a business comes with new demands. This includes multiple locations, more staff to manage, or more orders than you are used to. In addition to that, a possible disadvantage of business expansion is a potential decline in quality and lost customers. For small businesses, staying small and active instead of expanding can actually be more beneficial.
When a company invests money and other resources to expand, it has less capital available for other transactions—carefully evaluating the market potential before investing is vital. Consider the potential return on investment from each new market you could expand into before investing into expansion. The expansion also often means the assumption of debt. Your debt obligations can be controllable if sales and cash flow are consistent. However, an unexpected decline in the market can put tremendous pressure on a business that has significant monthly debt payments.
A business expansion may cause you to use the company’s resources excessively. If you get involved in too many markets or products, it can cause the company to be spread too thin. This way, the business might not perform well in any area. Expanding a business makes sense if your company has enough people and resources to cover the expansion without too many negative consequences.