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Adding a Second Location - Is it Too Much of a Good Thing?

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Jan 30

 

Adding a Second Business LocationEveryone talks about growing your business, building on success, and increasing profitability.  These are all good milestones for a small business headed for bigger and better things.  What is often overlooked is when the business jumps in, grows exponentially and then, almost with no warning, crashes and self-combusts seemingly from the shear energy of growth. There are warning signs when a business is on an atmospheric trajectory and things that can be done to ease the acceleration while still maintaining your course and speed.

 

 

Warp Speed Spending

 

Growth brings a litany of new expenditures on its tail.  Hiring employees, larger office or manufacturing space and investment in capital are just the tip of the spending. This is where cash flow tightens and it can become even more difficult just to make payroll nevermind trying to support an expansion plan. Once the cash crunch begins, customer service is often the next department to feel the impact of tightened budgets. Reduced customer attention can have an immediate backlash on sales especially with the advent of social media where no unhappy customer goes unvoiced. Create a plan for specific thresholds of sales volume versus customer service staff so that you can anticipate when your employees will need additional reinforcements in order to continue maintaining a high level of service. Granted when rapid growth occurs, it’s often difficult to gauge its speed, but a written plan will help keep you and your employees grounded and focused on the customer while shedding light on the end game when the road gets a little bumpy.

 

Leaving the Homefront Unattended

 

Business is exploding, your sales staff is on the road bringing in even more business and you’re out scrambling for bigger space, additional angel investors and new pipelines for production overseas.  Who is back at the office holding down the business? No one. Or at least no one with any authority to manage the day to day issues that arise and maintain the customer relationships that helped to grow the business in the first place. Before you find yourself in the throes of growth, ask if your business can truly function without you every day. Will your customers know that your presence is elsewhere or can they receive the same level of service, attention, and products whether or not you are onsite? If the answer to these questions is a resounding yes then it may be a good time to expand to a second or third location. If you answered no, then it’s time to evaluate how you deliver your product or service and start developing ways shift how your business operates. If you can’t run your business without you at the helm, then growth into multiple locations may not be the right choice. Evaluate other business models that will allow growth without fragmenting the core of what works for your market.  

 

Focus on Finances

 

Business owners can become so giddy with the idea of growth that the business plan and financial forecast is tossed to the side.  “Always go back to the financials,” says Peter McMahon, CPA in Plymouth, MA.  “Be sure that the profitability your business is currently making can be replicated from one location to another.” Does a second location offer even greater market reach and potential sales? Can you afford to double your capital expenditures, labor and overhead? Are there redundancies that can be eliminated or will you need to replicate nearly every facet of the business in a new location? Assuming that centralized accounting and human resources is the first step, will you be able to find cost savings in other areas of the business?

 

 

 

If you are looking to outside investors to fund your expanding enterprise, remember that first and foremost, they will be seeking profitability and a return on their investment. While that may seem highly logical, many small business owners don’t realize the substantial return on investment that angel and other investors will expect for their money. Typically, a 40 percent rate of return is not an unrealistic expectation, whereas banks will only look for around 10 percent.  Each option comes with its own set of tradeoffs.  Angel investors have more ‘skin in the game’ so they are often more involved with the business’ leadership and sometimes even set up an office onsite. Angel investors have an entrepreneurial mindset and are willing to let the business grow with a more aggressive risk-taking approach to finances. Conversely, banks will let you run the business more freely, but will keep an eye to auditable money trails such as accounts receivables and creditors looking for any telltale signs that the business is weakening. 

 

All in all, remember that while growth is good, expansion to a second location is not always necessary or needed in the name of progress. Evaluate your options, study the finances and be sure that your business model is replicable.

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

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