Business expansion is a daring step that many small enterprises undertake each year. Done properly, business expansion can spur greater growth and increase market share; however done incorrectly, it can destroy your business and corrupt your existing resources. Below are a range of guidelines that explain: how to identify if your business is ready for expansion; avenues available for expansion; and pitfalls to avoid.

• How do you know if your business is ready to expand?

• Different opportunities for expansion

• Dangers of expansion

• Effective Planning

How do you know if your business is ready to expand?

Thriving sales, high cash flow and a steady base of routine customers are generally considered tell-tale signs that your business is ready for expansion. There are however specific signs to look out for before moving ahead:

• Has your business shown consistent profits over the last three to five years? This indicates that strong performance is not a result of a single profitable period and is representative of the regular performance of the business over a sustained period of time.

• Has your business captured and retained at least 20 percent of the market? Maintaining at least 20 percent of the available customer base indicates that your business has a group of loyal customers and that there is a greater share of the market that can be captured through expansion. For tips on how to keep customers, see Five ways to win and keep customers >>

• Does your business have strong and consistent cash flow? It is important to have access to working capital when entering a period of expansion as you will likely incur an increase in expenses. Additionally, the regular expenses of the businesses will still need to be met during expansion.

• Are you prepared to distribute control? Most avenues of expansion will result in a business owner having less hands-on control and assuming a more strategy-driven position. Keep this in mind when embarking upon the expansion process. If you are not ready to delegate management or pass on trade secrets your chances of a successful expansion are lessened.

Different opportunities for expansion

Each business will choose a different method of expansion depending on their structure and what they hope to gain from pursuing a growth strategy. There are five main avenues of expansion available to businesses:

• Current market expansion - this involves selling more to existing customers and can be useful in gauging how they respond to the expansion. Customer feedback should be considered in assessing sales tactics and in structuring further expansion. 
  
  
• Selling a new product - this entails introducing a new product or service to your existing market, or adding a product to your existing offering, and seeing what sells well and what does not.
  
  
• Expanding into new markets - this refers to a range of expansion options: physically expanding to new locations; entering partnerships with other business; or starting an online platform. Before stepping into a new market your business must be doing well enough in its own market to warrant the expansion. 
  
  
• Chains and licensing - these options are frequently used by small businesses that are seeking to expand their network. Creating a chain or franchise is a good option for those businesses that can be easily replicated. Licensing is often seen as a less risky way to expand; it involves the rights to your business name and product being sold without the covenants on how the business is run. While this often draws a large number of investors it also means that you will lose control over how new sites are run.
  
  
• Diversification - businesses can expand their product lines and diversify their service offering to comprise a range of products from different markets. A highly effective strategy in diversifying involves the introduction of products that are complementary to your main offering, for example a shoe store offering socks, hosiery and shoe laces.

Dangers of expansion

There are some common pitfalls that many business owners fail to see. Keep the following in mind when expanding your business:

• Neglecting your existing business or customer base - when introducing your new business it is easy to get distracted and let your initial business and customers slip. It is your existing business that made you profitable in the first place; it should be considered your foundation and always kept running at a high quality.
  
  
• Diluting resources - ensure that your new business does not divert too many resources from your existing business. Think and plan carefully prior to the expansion so that your current business does not suffer.
  
  
• Competitors strike back - remember that as your business grows and increases its offering, your competitors will likely respond to the increased competition. This could mean a heavy discount in the price of their product offering or other tactics used by large-scale competitors to slow down your growth. Be prepared for such occurrences.

Effective Planning

Having considered the aforementioned issues, if you feel that your business is ready to take the next step, start the process by drafting a business expansion plan. Detail the forecasted changes and offer a schedule of how to proceed with and implement those changes. Growth will no doubt cause several managerial, legal and financial challenges. A solid plan and regular communication between management and employees will ensure a smooth transition into your bigger business.

To read more about business growth see Strategies for Business Growth>>