Growing pains
While opportunities for growth and expansion are valuable, this can be fraught with problems if you are not prepared. Gayle Bryant reports on what to factor into your planning.
While having your business grow faster than you expect can be a nice situation to be in, it also comes with a number of challenges. To be able to cope with a fast rate of growth, there are several factors to consider to assist with the challenges.
Commercial leasing strategies
One of the first things you may find if you are growing rapidly is that you are now too big for your business premises. Matt Walsh, director of real estate firm Blount Osborne Walsh says that if you think your business is likely to grow quickly, then it may be best to try and negotiate a shorter term lease upfront.
"For example, instead of signing up for five years with the option to renew for five years, try and negotiate a lease that is two years with the option to renew for two years, and then for another two years," he says. "Also, remember it is the tenant's option to renew, not the owners, so if you don't want to take up the option you don't have to."
But Walsh says there are no hard and fast rules for lease negotiation because if you are in an area that is popular, you may not have much sway with negotiating a lease with a shorter term.
"If you are wanting to take premises in a quiet suburb you will have more clout than if you want to be in a popular spot, say, in the inner city," he says. "But remember, there are advantages to locking in for a longer term in that you may have more flexibility with the rent you pay."
Walsh adds that you should make sure that your terms and conditions include the right to be able to sub-lease the premises in case you need to move to a bigger one.
"Usually landlords will not prevent a tenant's right to sublease," Walsh says. "But make sure you check. Also, if you think you may have to sub-lease because you've outgrown the premises, make sure your original fit-out is adaptable enough so other businesses will have no problem with moving in and running their business as soon as they get there."
If your business premises are comprised of a warehouse and a retail shopfront, you may want to consider separating them. Walsh suggests establishing the retail shop with a long term lease so that customers get used to you being there, and take on a warehouse in a quieter industrial estate where you can negotiate a lower rent and be able to move or expand as your needs demand.
"A shop tends to attract a much higher rental and often a landlord is not willing to offer flexible lease terms," Walsh says. "A factory tends to attract a much lower rental and a landlord is more likely to be flexible with lease terms."
Cash flow management
Ensuring you have the finance options in place to cope with a growing business is crucial. To cover costs, such as paying suppliers, you can generally draw on your credit card or your overdraft as short term options.
Ian Mallett is director of Aim Business Solutions, a business growth specialist.
"As soon as businesses see significant growth, that should be a trigger for them to go to their bank manager and discuss finance options," he says. "Overdrafts should only be there to cover the business for the cash conversion cycle which is the time between ordering the product for your business and being paid for it by your debtor."
Another option to help with cash flow is debtor financing. More banks are offering this to smaller businesses. Mallett says it involves a bank lending businesses an amount based on their debt book. In other words, it examines the total amount of invoices that you have, and pays you a certain percentage of that total. The bank gets its money back when the debtors pay their invoices.
"Some banks can be quite particular and only lend against debtors that have 30-day terms as they feel they are better payers," he says. "But it is an option that is used increasingly as an ongoing strategy to assist with cash flow management."
Leasing options
Having to buy new plant and equipment, or even raw materials, to make the products and services you sell to cope with growth can be expensive and have a huge impact on your cash flow. Mallett says options include hire purchase and finance leasing.
"This system allows the businessperson to free up their cash, rather than having to pay outright for expensive equipment," he says.
Hire purchase allows a person to pay a percentage of the price of the equipment as a deposit (although a deposit is not always required), and then hire the equipment in exchange for regular payments. The payments include an interest component. Depending on the terms of the agreement, the hirer can become the owner of the equipment, when the final payment is made. You usually also have the option to buy the equipment at any time during the term of the agreement.
Staffing requirements
One outcome of a fast-growing business is the need to hire extra people. Brian Walker runs the Retail Doctor, an organisation that assists businesses that are dealing with the challenges of growth.
He says having contractors and sub-contractors to draw on can get you over staffing humps.
"Ensure you have contractors on your books in case you need to take them on in a hurry," he says. "Alternatively, if you want to hire full-time staff but are unsure if your business growth is going to be sustained, make sure you take people on a three-month trial in case your circumstances change."
Mallett says when extra staff are needed, owners sometimes make decisions too quickly because they are desperate.
"They set themselves up for failure if they don't take the time to get to know the people they are hiring," he says. "If you choose the wrong staff you may be looking at tens of thousands of dollars wasted on training someone that you eventually have to put off."
Mallett says it is the service your company provides that determines whether your growth continues and if you have the wrong staff then that growth will be affected.
"Sometimes you have to say no to work if you feel that you can't cover your growth effectively," he says. "The wrong staff may also lead to reduced profit levels."
Engage your suppliers
Having good relationships with suppliers is critical for any business – especially ones undergoing rapid growth. Walker says to avoid being stuck with orders you can't fulfil, make sure you have a number of supplier arrangements in place.
"This also goes for distributors," he says. "And make sure you communicate accurately with them so they know what your situation is, then they can plan as well in case you need to request larger orders from them. This way, they can ensure they are able to cater to your needs. If your growth exceeds what you expect, make sure you have other supplier relationships set up so you can draw on them if needed."
Learn to read a balance sheet
Mallett's final word of advice is to make sure you know how to read a balance sheet. "Many people start businesses based on their technical ability but this is only 25% of what is required," he says. "Understanding profit and loss statements and forecasts will go a long way in ensuring your business not only remains viable but also continues to grow."
Another thing you can do to help with your growth is to have external networks in place. "Join speaker associations so you can hear about other people's experiences," Walker says. "And try and remember no matter how busy you get, to take time off for yourself."
Gayle Bryant is a business writer who contributes to The Australian.