‘Going for growth’ is a major decision for small businesses, and one that requires much careful planning. And although expansion can lead to extensive gains in the longer term, expansion will also have a direct impact on cash flow and profit in the short term.
First principles
The key to successful growth lies in good business planning and a sound financing strategy, which a surprising number of growing businesses fail to recognise.
Neil Cunningham, a Fellow of the Institute of Business Advisors (IBA), who runs Sunderland-based Cunningham Business Development Services, has worked with many small firms whose expansion plans are, he says, flawed from the outset.
In his opinion, ‘Many small companies see opportunities for growth and set out to capitalise on them, without first establishing whether they are in the right position to grow.’
Cunningham advises small firms to carry out short diagnostic tests that assess their strengths and weaknesses, ensuring that existing staffing levels and production equipment has the spare capacity to cope with increased business, and establishing a clear route to market.
‘There are often other interfaces to consider, such as distributors, wholesalers and sales forces,’ he says. ‘How well do they fit into your growth plans?’
Test your market
Before laying any firm foundations for expansion the golden rule is to look at the market first. Issues such as pricing can be crucial to success; companies need to know what their competitors are charging.
Red tape and business taxation have been highlighted as the two biggest barriers to growth for small businesses, so it is worth knowing whether there are any new regulations or initiatives that could impact on the market one way or the other.
‘This information gives a small business a competitive advantage,’ says Cunningham. ‘Knowledge is power, and the more you know about the market, the more likely your plans are to succeed.’
Financial issues
Central to any expansion plans is the issue of finance. But having reached the stage where their business requires additional funding to take it forward, owner-managers are not always clear about the best way of sourcing finance.
There are a number of government-sponsored grants aimed at specific areas of business, such as product development, innovation and internationalisation, and these should be explored first.
But if money needs to be raised, the nature of the funding will depend largely on the state of the balance sheet.
Alan Cornwall is managing director of Marshvale, a business consultancy based in Newcastle-under-Lyme, which specialises in turning around struggling businesses and introducing equity finance.
He says: ‘If the company has a strong balance sheet with plenty of fixed assets and lots of profits, the bank, and a medium-term loan (which are reasonably cheap at the moment), should be their first option.’
If the balance sheet is not looking too strong, the business will need to bring in new investment. This could include asking existing shareholders to put up some more cash, or looking to introduce a third-party investor, which could be a business angel or a listing on AIM, depending on the size of the company and the stage of its development.
What small businesses owners must avoid is any attempt to fund growth from working capital, a mistake that Cornwall sees all too frequently: ‘Entrepreneurs, by their very nature, only think about the chance of success today, and not the possibility of failure tomorrow. They talk to invoice discounting and factoring agencies who sell them the idea that this is a great way to grow a business. But that’s nonsense. This is not free money; it is working capital, and when you start using that to grow your business, it invariably leads to disaster.’
Look at loans
Another solution for companies with a viable business plan that are struggling to secure the finance to expand may be the Small Firms Loan Guarantee Scheme. Run by the Small Business Service (SBS), the scheme is for those who have tried and failed to get a conventional loan because they are unable to provide the necessary security normally required by banks and other finance companies.
Eligible firms should have an annual turnover of no more than £1.5m and the scheme will guarantee up to 85% of a loan of up to £100,000 (£250,000 if a business has been trading for more than two years) over periods of two to 10 years.
Strategy
The golden rule for growing businesses is to plan carefully, research the market, finance wisely and take advice, which doesn’t necessarily mean hiring expensive business consultants.
The network of Enterprise Agencies and BusinessLinks can be extremely helpful to small firms during the early stages of their growth. Costs can be further reduced by researching all the available resources.
Neil Cunningham adds: ‘If a company needs to increase its sales force as part of its expansion strategy, they should think about engaging self employed sales personnel and paying commission only. Organisations such as the British Agents Register have databases listing over 5,000 self-employed sales people.
‘In building up a new customer base, don’t just send out mass mailshots. Target your potential audience. People will respond to the personal touch.’
Finally, in searching out new customers for their brand new territory, or new product, businesses mustn’t neglect their existing ones.
‘A simple customer satisfaction survey speaks volumes about your business, and provides you with valuable information about your customers,’ Cunningham advises, adding: ‘Be professional. Do it right.’
