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How to scale a business

Petro Bothma of Business Partners Limited shares her extensive experience (along with that of the SME Toolkit’s distinguished guest contributors) on how to scale a thriving company.

What’s the first step when it comes to scaling a small business?

Plan your expansion down to a tee. While this may seem like the most obvious advice, many businesses often expand in reaction to circumstances and don’t create a solid game plan. Without this plan, businesses risk expanding too quickly or in an uncontrolled way, or even crashing and burning soon after the expansion. The trick is, therefore, to acutely manage the growth process to make sure you reap the medium- and long-term benefits.

What are some of the most common mistakes you’ve seen when owners look to scale their business?

Two of the most common mistakes made when scaling a business are expanding as a knee-jerk reaction to external circumstances and over-expanding. As we mentioned earlier, many business expansions are often a reaction to certain events or circumstances. These expansions are seldom planned or thought through, causing said businesses to lose their way as a result of making costly or ill-conceived changes to their previously-successful business models.

The trick is to acutely manage the growth process to make sure you reap the medium- and long-term benefits.

Related to reactionary expansion, is the mistake of over-expansion. When business is going great, it’s easy to get carried away and expand beyond the financial capacity of your business. This is known as over-expansion, and it is one of the biggest dangers of the growth phase. To avoid the risk of over-expansion, it is a good idea to plan your financial capacity based on a five-year projection of demand, allowing for an additional 10% of capacity over and above that. This is to account for periods of heavy demand or for partial downtime in any area of your business.

Remember, your business may go through several periods of expansion – it is best to phase these according to demand.

What would you recommend in terms of due diligence when it comes to crunching the numbers and being realistic about future growth?

The quality and depth of the planning you do will largely determine how successful your expansion is. The following four tips will help you take the best approach when planning your expansion:

1) Get professional financial advice
Regardless of the nature of your expansion, there will always be financial implications for your business. Getting professional advice is, therefore, non-negotiable. This is especially important when seeking funding for your expansion. For example, if you need to build or purchase your own premises, it is best to speak to a funder with experience in this area.

2) Shop around
An expansion is one of the biggest financial commitments your business will ever make. Taking the time and patience to decide what you need – and then to shop around for the best quality and price – will ultimately be a massive benefit to the success of your business in the long run.

3) Create a project management schedule for the expansion
Again, this may seem self-evident, but is a step that is often overlooked by business owners, primarily because many businesses do not treat their expansion like the project it is. In your project management schedule you should:
a) Identify key deliverables
b) Assign dates to these deliverables
c) Identify key responsibilities
d) Set up a regular review schedule
e) Establish procedures for managing non-delivery
f) Account for appropriate timing and financial contingencies. A project plan is a formal commitment to managing your expansion.

4) Keep your employees and customers informed
Expansions of any nature and size can disrupt your day-to-day operations. It is important that you obtain buy-in from your employees, as well as let your customers know what to expect and how the expansion may affect them. Your employees are the lifeblood of your business – it is vital that you keep them informed every step of the way, from planning to completion. Your customers are also crucial to the success of your business – letting them know how the expansion will benefit them will go a long way towards ensuring they remain loyal throughout the process.

When business is going great, it’s easy to get carried away and expand beyond the financial capacity of your business.

Any red flags you can highlight to warn companies about not jumping too soon or for biting off more than they can chew?
The importance of thoroughly thinking through your expansion before executing on it cannot be overstated. This is not only in terms of how to go about expanding your business but also in terms of deciding whether expansion is even right for your business. Ask yourself the following questions when thinking about planning your expansion:

a) What is the real demand for your product(s) or service(s) right now?
b) What is the projected demand for them over the next two to five years?
c) How big do you need to grow in order to meet that demand?
d) Can you afford (or find adequate funding to cover) the expansion?
e) Will expansion expose you to a wider customer base?
f) How will changing competitor activity affect your business over the next two to five years?
g) What should your excess capacity for unusual demands be?
h) How many additional staff will be needed and when should they best be employed?
i) What’s the best way phase in the expansion so cash flow isn’t compromised?
j) Where can you achieve economies of scale? In other words, where will expanding capacity reduce the cost of sales?

If, for example, the real demand for your product or service is low, declining, or has not increased (beyond your current capacity), then it is probably not the best time to expand your business.

Your business may go through several periods of expansion – it is best to phase these according to demand.

What are the dangers of NOT growing when the time is right?

Just as expansions based on little to no planning can be the death of your business, so too can the decision not to expand when the time is right. Generally speaking, the time is right for business expansion when:

a) You’re no longer meeting demand (due to your current operational capacity)
b) Your customers’ needs have changed
c) Expansion will expose you to more customers
d) You have done adequate due diligence and understand the potential risks
e) You have a good track record, and business is going well
f) You have hit a glass ceiling (the peak of your “game”, so to speak)

In the latter instance, choosing not to expand may cause your business to plateau or even begin to perform poorly. This is because customers may become dissatisfied and stop making use of your products or services if they feel like their needs are no longer being met.

Your employees are the lifeblood of your business – it is vital that you keep them informed every step of the way, from planning to completion.

Additionally, expansion also comes in the form of upgrades to operational processes, equipment, a change in direction and so on. By choosing not to expand and keep up with market trends, you may, in fact, render your business obsolete.

If leveraged correctly, expansion can be an invaluable opportunity for your business – so don’t waste it.

Petro Bothma is AGM: Enterprise Development at Business Partners Limited

www.businesspartners.co.za

OPEN UP THE SME TOOLKIT
Business Partners Limited has an initiative, the SME Toolkit, a one-stop shop for budding and established entrepreneurs in South Africa. The Toolkit provides how-to articles, business forms, financial tools, online training, and information resources developed by leading experts. It covers all aspects of business set-up and management, from business planning to marketing, to information technology, and everything in between.

Since its inception, the SME Toolkit has amassed a wealth of knowledge on various aspects of the entrepreneurial journey.

www.smetoolkit.businesspartners.co.za

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