Sunday, September 11, 2011

Capacity Is So Important When Considering Expansion

"The first requisite for success is the ability to apply your physical and mental energies to one problem incessantly without growing weary." ~Thomas Alva Edison

In today’s economy, so many businesses are looking into new markets and new products as a means of maintaining sales and profits. I have seen many businesses expand outside their geographical market or offer an entirely new product to their existing customer base.

While expansion is great, you must make sure that you have the capacity to deliver the new services or products. This may seem like a simple concept, but in reality, it is a very involved process.

We are working with a medical services business that wanted to expand their services to children. The market had very little competition and a very high profit potential, so on the surface, it appeared to be a wonderful opportunity.

Once we dove into the details, however, we discovered that the service could only be provided two hours of every business day because of school. With such a limited window of time, the firm would need a high volume of part-time help, which they were unable to find. Obviously, once this information came to light, they abandoned the proposition and began evaluating other areas where support resources were more readily available.

Another firm we are assisting wanted to begin offering a new product to its existing customer base. It was a product their customers needed and something they could easily provide.

Preliminary research showed their clients really liked the product and thought it was reasonably priced. Upon further research, we found that the firm’s sales would increase by $300,000 once they added the new product. So far, everything sounded great, and the firm was chomping at the bit to move forward.

However, the expansion did have some serious problems that we did not see when we were initially considering the proposal. First, in order to expand by $300,000, the firm’s accounts payable would have to increase by $50,000, and they would have to pay the manufacturer for the products before it could have them available for sale. Secondly, once they made a sale, it would be nearly 30 days before they would be able to collect payment from the customer.

The firm needed almost $100,000 to build up their inventory and support the accounts receivable increase. This was a problem for the firm since they were not going to be able to raise the equity, and financial institutions were not going to approve a loan. The firm quickly realized that, while the expansion seemed viable initially, the scheme just would not be feasible in implementation.

Each and every business needs to go out and look for expansion possibilities, but with any venture, you must make sure you have the capacity and resources necessary to ensure it will be viable and profitable.

You can do this!

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