Key financial and strategic considerations when scaling a business

The ultimate goal for most business owners is growth. Achieving and maintaining growth takes more than just ambition and hard work – it requires careful planning. Sean Bolter, Partner at Westcotts’ Plymouth Office looks at the key financial and strategic factors that businesses must address to scale successfully.

The first thing I tell any business looking to grow is that detailed planning for growth, and anticipating the difficulties and challenges that may come with this, will be crucial in giving them the best chance of success.

Without that planning, there is a risk that businesses overextend themselves, encounter cash flow issues or fail to deliver to their customers.

Business owners should create a strategic plan for their growth, with careful thought given to areas such as:

1. Market demand

Analysing your market and assessing its size allows businesses to factor in the potential for growth. Consider the target customers and assess their needs. Does the business align with these? Consider the competition and barriers to entry for future competitors.

2. Building your team

A business must ensure that its team can execute its growth strategies and can cope with the increased responsibilities. Establishing a strong leadership team will ensure there is sufficient oversight to enable the business to grow. Training and developing the team will also help the existing team to grow alongside the business. Having a strong team allows business leaders to delegate their responsibilities ensuring operational efficiencies.

3. Investing in technologies

As a business grows, its existing processes might not be fit for purpose. Investing in technology will help with automating processes, reducing human error and should help the team to operate effectively.

Having assessed the market and their own position within this, and having established a business case for growth, businesses need to establish whether and how they can fund expansion.

There are several key financial considerations business owners should consider when looking to grow effectively and they are areas where Westcotts will often work closely with a business to devise and stress-test plans and assumptions to ensure a robust approach is in place:

1. Cash flow management

As you scale a business, cash flow becomes a critical factor, indeed we have seen that it can often be one of the most limiting factors. Growth usually leads to an increase in expenses; purchasing stock, investing in assets and hiring new staff all place increased demand on cash reserves. Therefore, businesses should forecast future cash flow needs to ensure there is enough cash to cover new costs.

Renegotiating payment terms with both customers and suppliers can help ease cash demand and prevent any shortfalls in liquidity.

Monitoring and plotting incoming and outgoing cash demands on an almost daily basis will also ensure that a business remains liquid and that any potential issues can be picked up and addressed quickly.

2. Securing funding

Obtaining funding enables business owners to acquire the required capital to achieve their growth goals quicker. Typically, this is seen via debt financing (loans and asset finance), equity finance (selling shares in the business) and alternative routes such as grants or crowdfunding.

Most lines of funding require repayment with interest. It’s important for business owners to understand the repayment process so that the business can ensure it is able to meet the repayment obligations when they fall due.

3. Budgeting for expansion

Scaling a business will require a detailed budget that includes all new expenses and asset requirements. Accounting for and regularly reviewing all new expected costs and their impact on cash flow will ensure that the business can trade through these costs.

Of course, building a business does not come without significant risk and it is important to consider this up-front. Scaling a business can stretch resources or overwhelm existing systems or processes. Thought needs to be given to potential growth pitfalls and a business needs to plan carefully to recognise and mitigate against these:

1. Overexpansion risks

Overexpansion arises when a business grows too quickly which impacts its ability to manage growth effectively. Areas where this is typically seen are; resource strain (where the business has a limiting factor which cannot be scaled at the same rate of the growth, usually in skills or cash); and lack of focus (where a business looks to expand into new markets or additional services focus is often taken off the core of the business leading to decreases in quality).

2. Maintaining Quality and Culture

Quality and culture are two of the main features which attract and retain customers and are key reasons why the business has realised its success. Growth can pose a risk to this, leading to the business not aligning with its original customer base, poor customer experience or a loss of culture. Creating systems which allow the business to grow and maintaining consistency in product or service is key to growing successfully. Keeping the company values and culture at the forefront of the growth plans will ensure the business retains and builds upon its existing brand and customer base.

Realising growth is an exciting phase of business development. It does however require careful thought and planning to ensure the business remains sustainable and profitable.

By taking a measured approach, managing cash and not losing focus on what made the business great in the first place, owners should be able to scale efficiently, allowing the business to thrive.

Seeking expert financial and strategic advice early can make the difference between sustainable growth and costly mistakes. If you’d like to discuss this further, feel free to reach out to Sean Bolter at sean.bolter@westcotts.uk or 01752 666601 or contact your local Westcotts office.