by Hayden Quin, Director of Business Services, BDO KwaZulu-Natal
When is it a good time to embark on a growth drive? What conditions make such a move favourable? Often, in difficult markets, different opportunities arise, for example the weak rand offers a gap in the market for exports to achieve bigger margins. Currently the drought has meant that maize has to be imported so a clearing and forwarding company could take advantage of the additional volumes to grow their business. There may be other unusual circumstances for opportunistic gains.
Conversely, what circumstances would make it unfavourable to consider a growth drive and to rather consolidate? It all depends on the company’s performance and its reserves. If a company is struggling it would be better to consolidate to maintain the current growth rate. The same applies if the projections for a growth spurt indicate that the risk would outweigh the returns or if there would only be short term gains.
The first thing to do when considering a drive to grow your small business is to sit down and do your homework, both to satisfy yourself that the expansion will be profitable and to provide convincing supporting documentation for your finance application.
Prepare a budget including detailed expenses and Return On Investment (ROI) figures to establish that the growth drive is viable.
Once the accounting work is done, bring in the operational staff and together discuss whether the numbers in the budget are achievable. There may be instances where the accountant’s estimates are not attainable by the operational team. Their feedback will result in an accurate and realistic budget.
If you have a HR department, seek their input about what extra staff may be required and what the cost would be. If you don’t have HR staff, you will need to calculate this yourself.
Consider the IT implications. It is worth spending time on giving serious thought to how IT can help enable the growth strategy.
Finally, plan the roll out. Is it logistically possible? For example, if you want to grow into Africa there will be border and transport implications or the necessity of acquiring agents, forming joint ventures or setting up offices in other countries with different business environments. This requires thorough research.
Assuming the circumstances and the numbers are right for a drive to boost growth, what are the different options for financing to enable growth?
- It would be remiss not to first approach existing shareholders, map out the strategy and budget and ask for finance. This is a cheaper form of finance. The shareholders will be particularly interested in the return on investment, dividends and when the loan will be repaid.
- A small business bank loan is usually easy to procure but applications can take time and full financing is not always approved. Interest rates and the loan period will impact on the growth budget. The bank will also require security, often in the form of property, which constitutes a risk if the property involved is the family home. There will also be pressure for the loan to be repaid on time and failure to do so may result in bankruptcy or, at least, a poor credit rating.
- Obtaining unsecured debt is not desirable as the source will punish with a high interest rate.
- Approaching factor debtors to unlock money in trade receivables is an option but one that could tie the company in for an extended period and the charges may be high.
- Consider giving a share to a new shareholder with deep pockets. Whilst this means losing ownership and possibly, some control of the company, the right new partner could set the company on a new, highly profitable course which would be more beneficial in the long run.
Financing a growth drive will always be a challenge for the small business. When planning your growth strategy and selecting your financing option, it is worthwhile to remember the old adage – where there is risk, there is reward. The risk can be minimised with sound preparation and the rewards can be significant, both for the business and the local economy.