Balancing Your Expansion Budget: Key costs of setting up shop in new markets

Published · 3 min read

Increased customer demand and booming sales aren’t the only things that makes expanding your business a smart move. Because your potential global customer base seems willing to buy more, doesn’t mean you can profitably sell more. Taking into consideration a variety of factors related to increasing your sales, you can create a helpful logistics and cost analysis to determine when to expand. Consistent assessment is essential to keeping costs and overhead under control. Here are some key things to remember when measuring and managing your expansion.

Projected Sales

The first analysis you must make when considering an expansion is the sales increase you can realistically expect. In some instances, expanding to meet increased demand can cost more than the increase in revenue! To effectively determine whether or not an expansion makes sense, calculate optimistic and conservative revenue projections so you can perform your other analyses against these numbers.

Operating Costs

Calculate your increased operating costs after expansion starts. This might include more staff and supplies, increased rent and utilities, and machinery or equipment maintenance. Determine your numbers for production and overhead costs. Once you know these figures, you can figure out your potential profit margin per unit and total gross profits based on your two sales and revenue figures.

Expansion-Specific Costs

Some expansions include one-time purchases, such as new equipment or office space, or short-term expenses, such as a marketing campaign, staff recruitment, and training. Calculate the initial costs of an expansion, which do not include operating costs, to help determine when you will break even and start making a profit.

Technology

Think about the technology that you need on board during times of expansion. It’s important to consider a solution that will grow and expand with you and your business. Is your solution fully mobile and can it be accessed from anywhere at any time? Is it available in the cloud? Business Management Solutions will do just that, helping you to grow and stay agile at the same time.

Cash Flow

Fulfilling more orders often means extending more credit while increasing your expenses. You will have to pay for materials and staff time to handle new business, while waiting for payment for these orders. Determine if you can meet your cash needs based on your current cash and available credit, the credit terms you offer customers, and your sales scenarios. Expansion might require you to take out a loan, negotiate new vendor and supplier payment terms, and to change the credit terms you offer customers and clients.

Calculate Return on Investment

When you know what your start-up and operating costs will be, potential sales volumes and gross profits, calculate your return on investment (ROI) by subtracting your total expenses. Do this twice! Make one calculation up to the point that you pay back your initial expansion costs, and do the calculation again for the period after, when you only have operating costs. If you can quickly pay back your initial expansion costs and make a profit subtracting operating costs from revenues, congratulations!

Key Logistics Areas You NEED to Address Before Expansion

In review, ask these questions as you think about expansion strategies. The metrics of success can be derived from these questions:

  • Can existing operations handle a sudden boost in demand? Are current operations, including order management, customer service, record keeping and inventory control, running smoothly and ready to take on more?
  • Do employees have the necessary skills to support your growth strategy? Will you need to hire new staff or provide additional training?
  • Is your information technology sufficient to handle your business growth? Can you measure the effectiveness of newer technology vs. staff efficiency and customer satisfaction?

Keep in mind, cash flow isn’t always the best measure of success. In reviewing your company’s current logistics, wherever you see gaps, find ways to improve in those areas. Reassess weak areas from a non-core or core competency angle. Is the weak area something you can outsource?

Going through these exercises will only bring your goal of expanding into focus. You’ll be glad you did your financial and logistic planning when you’ve successfully grown in a new market.

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