Know Your Numbers When Planning for Expansion

Know Your Numbers When Planning for Expansion

Article Written by Eric Bank

In the life of any small business, expansion is an exciting prospect. It signifies that your company is working well and will benefit from getting bigger. Expansion can be risky, but you can cut the risks by knowing your numbers -- sales and costs. You need to know your business' sales volume, its costs and the difference between the two -- margins. Knowing these will demonstrate that you are organized, confident and in command.

Sales

Sales drive all aspects of a business. If you are the owner, it's not reassuring if you are ashamed or vague about your sales. Couching the numbers with phrases like "more or less" or "approximately" causes second-guessing by the others participating in the expansion, including partners, lenders and employees. If you don't know your sales numbers, ask yourself:

·        Why don't you know, precisely? Lenders often say that owners of good businesses know their current sales figures almost to the penny.

·        Do your sales numbers depress you? Sometimes, an owner feels the company isn't doing well and is reluctant to think about the actual sales numbers. That's a troubling message to send to others.

·        Are you too busy to be effective? If you are disorganized and can't focus on your sales figures, expansion will only make things worse.

·        Do you realize that, as the business owner, you are the first one who will suffer from weak sales? Owners have to predict profits for the next period, so that they can pay for expenses and draw a salary. If you don't have a handle on your sales volume, you can receive an unwelcome surprise that forces you to make painful adjustments -- your business can't keep spending money when sales are going down the drain.

Costs

It costs money to make or merchandise a product or service. A business owner must grapple with all costs - direct and indirect, fixed and variable. Although a service-based business has revenues that are not necessarily directly tied to costs, a company that sells products expends costs in each unit produced or bought. Then there are the fixed costs, such as mortgage, utilities, rent and administration, which you must pay even if you lack sales. 

Tracking your costs is imperative, no matter whether your business is expanding or cratering:

·        If your company is growing, you want to make sure good feelings don't hide the fact that you're overspending, because you might suffer an unanticipated slowdown.

·        If your company is faltering, not pinpointing your costs is another kind of denial, which we've already named as a big red flag to others. You should be reducing costs so that they stay proportional to sales.

Your business expenses, direct and indirect, are tax deductible -- a good thing -- because you first have to spend money to make money. You need proper bookkeeping to record and allocate your overhead costs correctly. For instance, how many miles did you travel  order to meet with customers and complete sales? Travel expenses, including depreciation of vehicles, must figure into the cost of each product or service you offer. 

The bottom line: Use a small business accounting firm to take care of your bookkeeping.