Budgeting for expansion

Understand your goals

A good place to start is knowing exactly what your goals are. This can be anything from opening a new location to expanding your product lines to entering a new market. Each has factors that must be considered, and the costs associated with each will vary.

Understanding your goals will enable you to determine how much money you'll need to finance your expansion.

Budget for growth

Depending on the scale of your expansion, both your fixed and variable costs are likely to be higher than before your expansion. Make sure you're prepared to cover these higher costs.

Forecasting your cash flow for expansion is a crucial exercise. Analyze your variable and fixed costs in detail by ensuring your forecast includes the projected costs for your growth project and the day-to-day running of your business pre- and post-expansion.

You'll need to know your one-time costs and your ongoing expenses. One-time costs include items such as lease deposits, construction or renovation costs, and purchasing new equipment. Ongoing expenses include employee salaries, rent, inventory, marketing, and utilities.

Forecasting will highlight any potential areas of risk or hidden problems. In addition, if you're unsure about some details of your strategy, running scenarios through your forecasts will help improve your plan's pace and scope.

Run a pessimistic, realistic, and optimistic version of your final financial forecast. This will help avoid the temptation to be overly optimistic and demonstrate to potential lenders and investors how carefully you're thinking about the implications of growing your business. When you identify risks, show how you plan to mitigate or address them, for example, by having enough cash reserves on hand to cover costs for a year.

Get your accountant or financial adviser to confirm what you've planned is realistic. Try also to consult experts in the field and business owners with experience in growth – their advice may help you draw up a more realistic expansion plan and avoid some hidden pitfalls.

Financing your expansion

Depending on the business type and planned growth scale, your own operating revenue or cash reserves may cover your costs. This allows you to proceed without taking on additional debt or selling shares in your business. On the other hand, borrowing money or finding investors may give you a large amount of cash in a lump sum if that's what you need.

In terms of external financing, the most obvious option is to discuss plans with your bank and try to secure a loan. If you welcome the idea of having additional skills and experience on hand, you may want to see if you can attract investors as another option.

If you're scaling your business, you may not need additional financing for the expansion. Having systems in place that enable you to scale will make the process easier and more efficient. You can scale your business by targeting new customer segments, using technology to boost efficiency, licensing or franchising your business, or collaborating with complementary businesses.

Spend time

As in all business areas, planning and budgeting for expansion requires careful thought and time.

No matter your financing plan, optimizing your cash flow leading up to expansion makes sense – you want to have cash available for any unforeseen circumstances. Use your expansion as a motivator to tighten up your credit control and spending. You could run your business through a financial health check to ensure you've found any issues that need addressing before you launch.

You could also calculate your cash burn rate and your cash zero rate, so you have some timeframes in mind for achieving a positive cash flow after expansion.

Next steps

By taking the time to strategize, you can set your business up for success during an expansion. Whether you expand or scale, it's a great idea to take a look at your finances and make decisions that protect your finances and are guided by a realistic view of your expansion plans. Forecast your cash flow, make sure you have a budget for growth, and talk to a professional with knowledge in your industry so you can anticipate obstacles.