Considering growth
Here are some useful guidelines to factors you might consider when your business is ready to grow. It is not intended as an all-encompassing plan - just a starting point.
When your business is up and running successfully you have two options.
- Consolidate your current position and maintain your trading level.
- Grow and expand the business.
Going for growth.
If you decide to go for growth, first take stock of your current position to be sure that your core business is performing well. It's easy to get distracted during the growth phase and neglect existing customers, which would be a mistake..
Your existing customers will underpin your growth and provide cash flow. They can also add to growth through recommendation to friends, family and neighbours.
To assess your readiness for growth consider the following:
- Is your business able to handle new work or is it already operating at capacity?
- Are the resources and systems in place to service existing customers and complete scheduled jobs while targeting expansion elsewhere?
- How will you ensure that existing customers aren't disrupted if you win new business? Remember that in the building trade reputation counts for a lot and you could jeopardize yours if you disrupt existing projects to accommodate new jobs.
Options for growth
Option 1: Increasing market share
Taking a greater share of the available market is one way to increase your business. To do this you need to attract new customers and position yourself in such a way that you are able to take business away from your competitors.
In order to take this route you need to have a clear understanding of your market and your rival businesses.
Consider the following:
- Are there potential markets that you haven't targeted before - for examples if you usually concentrate on domestic projects, perhaps consider targeting the commercial sector.
- What is good about your competitors and why do customers choose to use them rather than your company? How can you better sell and advertise your business to your potential customers?
- Do you need to reconsider the way jobs are costed and quoted to your customers?
Option 2: Diversification
Diversification can involve
- Offering new or related products/services to existing customers
- Finding new markets for existing products/services
- Offering new products/services to new markets - usually the most difficult option
Many small businesses choose to diversify although it can be risky if you stray too far from your own area of expertise and core business.
Generally, it is better to sell familiar products and services to a customer base you know and understand. So, for example, if you currently offer a painting and decorating service why not invest in training in a new skill such as floor laying or tiling that you that you can readily sell to your existing customers?
Option 3: Partnerships, joint ventures, mergers and acquisitions
Another means of growing your business is to join forces with another company.
Obviously this will have an impact on decision-making - you will have to share the management and there may be staff issues to resolve.
However, joining forces with another company can immediately bring the advantages of more resources, shared decision making, more skills and more contacts.
Partnerships & joint ventures
Through a partnership or joint venture you may be able to open up new markets or improve your offer to existing ones.
For example, a decorator may wish to team up with an interior designer, plasterer or general builder to form a company that offers a complete service. This will not only give the company wider consumer appeal but will possibly open up new markets as a 'full service' provider is able to bid for larger jobs and contracts.
Before following this route it is important get on with the people you team up with and you should also be clear about the conditions of the partnership or joint venture. It is worth taking legal advice about the best arrangement for your business as there may be implications for the way the business is run and how its profits are taxed.
Before embarking a joint venture agree the following:
- The structure of the new company and its objectives
- Financial contributions to be made by each party
- Ownership of assets
- Employee status
- Management and control issues
- How liabilities, profits and losses are shared
- How any disputes between parties will be resolved
- How the joint venture can be ended
Mergers and acquisitions
An acquisition is when you buy another business and end up controlling it. A merger is when you integrate your business with another and share control of the combined businesses.
Mergers and acquisitions are more suited to established companies and the process will involve commercial lawyers and considerable legal work.
For more information about mergers and acquisitions visit your local Business Link www.businesslink.gov.uk
Financing growth
Sound financial planning is the foundation of any growth strategy.
You need to establish how much is required to fund the growth, when the finance will be needed and when it will become available.
To do this a detailed cash flow forecast is essential. Remember that money going out will rise sooner and faster than money coming in. There must be enough money available to keep the core businesses running and it is always a good idea to have some surplus available in case you encounter unexpected costs.
Your likely sources of money will be via debt financing (e.g. a bank loan) or through equity finance (money from others taking a share in the business).
Return on investment
Once you have made the commitment to growth, the next step is to assess all the costs incurred in getting your growth option under way and compare them against anticipated profits.
One of the most popular ways of calculating if your figures are on target is to test them using the Return on Investment (ROI) formula. This will tell you what percentage of return you will get over a specified time. Three years is a good timescale for an expanding business.
ROI is determined by taking the total investment sum, working out the increased revenue it will generate each year and the net profit from that, then calculating that as a percentage of the investment.
It is a good idea to test the ROI with a number of different sales figures as your initial predictions could be affected by a number of factors.
Look at examples of ROI calculations on www.entrepreneur.com
Further information is available from:
Business Mentoring
Going for growth doesn't mean you have to go it alone. The perspective of another person is always useful at the beginning and during the expansion period, and this is where a business mentor can be a great asset.
It is very likely that you already have mentors, though may not have recognized them as such. Every time you turn to somebody as a sounding board or ask for an opinion on which direction you take, you are effectively consulting a mentor. These can be professionals, such as solicitors or accountants, people you have met through business or social networks, and of course friends and family.
A business mentor however is usually another business leader who can give you their own knowledge and expertise to help you develop your business. They can assist in many ways.
- Provide focus on the long term needs of your business
- Give you a chance to evaluate your own development requirements and identify the right learning methods
- Unlock creative ideas to solve problems and explore options
- Supply more awareness of the resources, business networks and other support available for your business
- Increase motivation
For more information contact your local Business Link who will be able to give further help with many of the issues touched on here. The above information is correct at the time of writing (July 2009) but please check the details are up-to-date with the various organisations listed.
The contents of this guidance are for information only and no guarantee, representation or warranty of any kind is given (whether express or implied) in relation to any of the information, advice or opinions expressed in it. Whilst ICI Paints AkzoNobel have made all reasonable efforts to ensure that statements appearing in this guidance are accurate, ICI Paints AkzoNobel disclaims all liability and responsibility arising from any reliance placed on the information, advice and opinions contained in this guidance. ICI Paints AkzoNobel reserves the right to make any amendments or alterations to this guidance at any time, without notice.