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5 Mistakes to Avoid During a Business Expansion Project
September 05, 2018
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5 Mistakes to Avoid During a Business Expansion Project

Expanding your business can be very exciting. Whether you are opening a new location, increasing your operating volume, or unveiling new products, expanding can help you move closer to achieving your entrepreneurial dreams.

However, expanding can be a risky venture, and it’s important to be prepared.  In this post, we’ll discuss some of the risks involved in expanding your business and will suggest how you can avoid them. By developing a detailed, risk-averse expansion plan, you’ll be able to get through your expansion project without unnecessary stress (or worse, failure).

Don’t Make These 5 Major Mistakes During Your Expansion Project:

1. Exceeding Your Budget

 Many business owners make the common mistake of deciding to expand without setting a clear budget. This can be a dire mistake, that leads many entrepreneurs to run out of money long before their project is complete. Instead, you should determine your budget first, and then see if expanding your business is a viable option.

Creating a budget requires multiple steps. To avoid exceeding the amount you can spend, it’s generally wise to be conservative and assume you’ll be paying your expenses on the higher end. Having a budget surplus once all your obligations have been settled will be significantly better than having a budget shortage.

2. Expanding Too Quickly

Even if your business is remarkably profitable, that doesn’t necessarily mean you’re ready to begin operating on a larger scale. If you’re not careful, expanding your business too quickly can result in decreased profit margins and a lowered level of leverage.

Determining whether it’s the right time to expand will require a reasonable projection of costs and revenues. You shouldn’t assume that opening a second branch of your business will immediately “double” your current financial situation. You’ll need to consider seasonal trends, your customers’ needs, and other contributing factors that could lower sales, even if you expand your business.

3. Failing to Conduct Market Research

In the rush to expand, some business owners make the mistake of failing to perform market research. Since every decision that your business makes is marginal, it’s important to use an opportunity-cost perspective that can be justified with tangible data.

Considering the 4 Ps of marketing — product, place, price, promotion — can help you justify your decision to expand. For example, if you’re considering expanding your product line, you should look for data suggesting that such a product is in demand. Similarly, if you want to open a second location, you should find out if recent research suggests a new location will attract new customers.

4. Making Too Many Promises

Ultimately, the most useful thing your business can do when expanding is be realistic with your expectations. Even if you’re very optimistic about your future, having projections that overstate your short-term potential can be very dangerous. Typically, being conservative with your promises will be much better than guaranteeing too much.

For example, if your business promises customers that your expansion project will be complete by a certain date, failing to do so could cause them to seek out a competitor. Or, if you tell employees that you’ll be able to give them raises once the project is complete, but then run out of money, they might look for new jobs.

5. Using a Fixed-Cost Pricing Model

Lastly, a common mistake made by expanding businesses is using a linear, fixed-cost pricing model when creating future projections. However, very few businesses operate on a linear scale and their costs will inevitably vary as time goes on.

Things that can “break” a fixed-cost pricing model might include variables such as the eventual need for employee healthcare, increased utilities, tax changes (especially when expanding into other states), among others. The best financial projections will be the ones that take all relevant details into account.

Conclusion: Ensure That Your Business Is Prepared to Expand

Before you start your expansion project, you should be able to justify your plans on paper. If expanding your business isn’t going to generate more sales, then your expansion project should be pushed to a later date or refined until it fits your needs. If you can justify it, however, having a detailed plan will help you complete the project without hurting your customers, employees, or overall operations.

If you have tips for business owners that are preparing to expand, let us know in the comment section below!

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Andrew Paniello
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Andrew is an experienced writer with a degree in Finance from the University of Colorado. His primary interests are investing, entrepreneurship, and economics.
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