Business expansion takes forward thinking

When expanding a business whether constructing a building, increasing a product line or enhancing existing operations a company inevitably faces a variety of dollars-and-cents issues during the process.

Gary Lewis, vice president and director of commercial lending at Great Southern Bank, said two primary indicators tell a business it's the right time to expand.

The first indicator, Lewis said, is when the company begins to feel production pressure. Orders exceeding the capacity of the existing product line put a strain on cash flow as well as the physical facility, he said.

The second indicator that expansion may be necessary is if the company identifies a new niche or product for its market, Lewis said. That might require an expansion for retooling or acquisition of additional equipment and/or manpower to produce that separate product line, Lewis said.

Production expansion in either case would require financing of some sort.

Cash flow

Rayanna Anderson, assistant director of the Small Business Development Center, said sometimes a business's bank account can indicate when it's time to expand.

"Many times it's when they're running out of money. Their sales are increasing but they have no money. Growth eats money. You have to have the cash to support growth to be successful," Anderson said.

Cash is eaten in operating accounts, she said, because as a business grows, more money is tied up in inventory, accounts receivable, purchasing and other necessary entities that support the new growth.

"While you may be very profitable, your cash may be going down dramatically," Anderson said. That is probably a good time to expand if the business can support the growth, she said.

John Ford, vice president of small business lending at Bank of America, said if expanding means diversifying a product line or offering additional services, it is a good move. If a sales decrease is apparent in the company's original product line or services, that new line of business can counteract those lagging sales, Ford said.

Before expanding a business, Ford added, owners should be sure it is able to handle the growth. That may mean hiring additional staff, purchasing new machinery or utilizing outside resources.

"There are some businesses that fail because they grow too fast," Ford said.

Uncontrolled growth can be very difficult to absorb, Anderson said. "They need to have some processes in place to be able to support the growth internally," she said.

Realistic estimations

The first issues many companies face when expanding, Anderson said, include underestimating how much working capital is needed, underestimating how much inventory is needed, underestimating how quickly customers will remit payments and underestimating what type of terms will be available from vendors.

"Those are the key things that really affect cash flow," Anderson said.

A business owner needs to work with his banker to update the company's financial statements before expanding, Ford said.

"We base decisions on historical cash flow. We look at how the company has been doing the past couple years," Ford said. " I try to work with my clients and know what's coming up in the next year or two so I can help them plan a little bit better."