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Personal Finance

Pitfalls to avoid when expanding your business

debt
If you must borrow, do so within your means. FILE PHOTO | NMG 

It is every entrepreneur’s dream to expand their business. Growing from a startup to a business with branches and international operations is a great achievement.

While it is the best thing that can happen to any business, it is not always as easy as it sounds. It comes with its challenges which at times could be detrimental to the very existence of the business.

Statistics show that sudden expansion or over-expansion is a leading cause of business failure in many parts of the world and many Kenyan businesses have no exception even after a steady period of growth and expansion. These entrepreneurs go through the full cycle; first, it is a success, then growth and expansion only to finally come crumbling like a house of cards.

Failure after humongous success sounds unconventional, but it is not. Expansion risk is too high that it only comes second to starting a new startup. Things can go wrong, and plans can backfire. Strategies that may have worked before may not yield returns during expansion.

The problem could be the new market or the new product or new everything, but they all can lead to one thing – failure. If expansion is on your radar, then you can face the new journey armed with the following principles.

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EXPAND WITHIN YOUR MEANS

As a general rule, expansion should be driven by organic growth which is the growth that comes from within. This simply means that expansion should be backed by cash generated by the business from its operating activities. If this not the case, then your business is not ready for expansion.

If you must borrow, the same principle applies. You should make sure that you can repay the borrowed amounts from the cash generated by the business from its operations. Borrowing within your means can scale up the expansion, but if not well grounded, it could mean trouble for the entire business.

Expansion is a long-term venture and should be financed by long-term borrowing. There should be close matching of the borrowing, the expected rate of return and most importantly the cash inflows. A viable expansion plan should generate enough cashflows to cater for its operating expenses and repayment of the loan.

Even with viable ventures, borrowing should be controlled. You should avoid overburdening your business with debts just in case some of your plans do not work all the way.

Sometimes business projections can go wrong, and you should be able to survive such a disaster. The debt should not break the backbone of the entire business.

NO OLD WAYS

Growth comes with new challenges and requires a new way of doing things. What worked when you started the business may not work today. When you were small you could carry the keys home but not anymore. You are now big, and your business can be run by anyone if it is well structured.

Create a business structure that can yield a sustainable business model that can scale the business to the next level. Once you establish your vision then you should have it realised through strategy.

Your strategy should encompass production, marketing operations finance and any other function relevant to your business. With all the functions well-structured and an operating system in place then you can autopilot the business to the next height.

DO NOT TAKE YOUR EYE OFF THE BALL

It is very easy to focus on expansion and forget why you exist in the first place. Do not be carried away and forget where you have come from. Look back to ensure your base is intact. Remember without a strong foundation you cannot grow. Do not neglect your old clients at the expense of the new ones. Keep your promise.

If you are expanding the range of the products, do not deviate so much from the original product that you identify with. Stick with it and make it your brand product. Ensure it is of very high quality and leverage on it as you grow.

DUE DILIGENCE

If you are expanding through the acquisition of another business, it is paramount you conduct due diligence. Do not use your guts.

Conduct your independent investigation into the business you are about to invest in to avoid any surprises.

Due diligence not only looks at the finance and legal aspects of the target business, but also the overall wellbeing of the business. Its main objective is to understand the business, the environment into which it operates and the probable prospects.

The best way to do this is by engaging independent professionals. Agree on a checklist which should contain all the information you would like to review. The more information you get the better. After the review and analysis, a due diligence report with the experts’ recommendations will help you to make an informed decision.

DO NOT IGNORE CULTURE

If you are expanding outside your home region, then you cannot afford to ignore the culture in the new market. Your culture at home may be detrimental to your success in the new market and you must exercise a delicate balance without compromising your core values as an entrepreneur.

It is paramount you understand the new culture so that you know how to deal with customers, employees, the government officials and the society at large.

If you export your home culture without first understanding the local culture, you might experience challenges that could mean a loss to your business.

A diverse culture is a beautiful thing, but when running a business, you must always go for what is good for the business. Sometimes to thrive in the new market, you must conform to the new culture. Customer behaviour varies from one location to the other. What may have worked in your hometown may not work in the neighbouring town.

KNOW YOUR LIMIT

Finally, know when to slow down and when to stop. Overstretching expansion will only create a bubble that will eventually bust. Do not break your back by compromise your financial strength while chasing new territories.

A good soldier knows when to fight, when to retreat and when to surrender to fight another day. A good businessman knows when to slow down and when to stop the expansion to stabilise the business.

The writer is Head of Finance at Zamara Group.

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