If you’re saying “expand my business to the next level of turnover and profitability”, this is probably a bigger challenge than when your first launched your company.

You may have read in business books that getting to the first £1m turnover is the hardest thing you can do but then going from £1m to £2m turnover is much faster and less complicated by comparison.

That all comes down to the incremental decrease in the extra marginal costs your company experiences at different stages of growth. In this article, Burton Beavan looks at what you need to do to expand your company.

Expand my business – one-off charges

You’ll incur two major financial shocks when you try to expand – one-off charges and the increase in your fixed costs.

Depending on your space requirements, you may have to scale up your premises. Serviced offices are expensive but do offer an easy-in, easy-out flexibility if your expansion does not go to plan. If you’re in serviced offices for 9 months or more, you’ll end up paying far more year on year for your accommodation than you would if you took out a commercial lease.

With a commercial lease, you agree to take out space over a fixed period of time. Most leases last for ten years but you can reduce your exposure during negotiations by asking for break clauses at years 3 and 6. Commercial leases take time to finalise and please put aside anywhere between £5,000 and £15,000 for legal bills.

As you grow, you will have to invest in new fixtures, fittings, IT, IT infrastructure, and general office equipment. This adds up very quickly.

In addition, if yours is the type of business that holds one or two months’ stock, you may have to increase that to three or four months’ to be able to service the increased levels of demand your expansion will bring.

One other thing to think about is recruitment costs. If you use a recruitment consultant at standard rates and you look to take 5-10 members of staff or more on at the same time, you may end up paying £10,000s in fees.

Expand my business – fixed costs go up

You’re in your new premises. The new staff have sat down for their first day at work. The new stock is sitting in the warehouse area of your space waiting for dispatch.

Fixed costs are those costs in your business which are unaffected by the level of sales your company is making.

Being in larger premises, your cost of renting will be higher. If you’ve chosen a commercial lease and moved to a more prestigious location, you’ll see a large increase in business rates payments.

Your wage bill (before bonuses and commissions) will increase as will the demands on the stock levels you hold.

Let’s use the fictional “Boxes Direct 2 U” in this article. If their fixed costs were £20,000 a month on £30,000 a month turnover before they expanded and their fixed costs are now £40,000, it’s time to take action.

Expand my business – now get to break even

The first thing Boxes Direct 2 U needs to do is to work out what it takes to get to breakeven point. They’re currently spending £10,000 a month more than they’re taking in but losing more than that because there is a cost to what they’re selling.

Let’s say that for every £1 Boxes Direct 2 U takes in, they make 80p gross profit before fixed costs. If these costs are now £40,000 per month, take that £40,000 and divide it by 0.8. This brings up a figure of £50,000 a month to break-even.

From somewhere, the company needs to find an additional £20,000 a month in sales to cover its costs. That’s an increase of 66%. In order to stop the company haemorrhaging cash, their new staff need to find this additional 66% as fast as they can and be able to sustain trade at that level.

Expand my business – to get to the level of profit you want to make, how much do you have to increase turnover?

Before the business expanded, it turned over £30,000 making 80p in the pound before fixed costs. With these costs at £20,000, they made £4,000 a month profit.

No-one ever wants to expand their business and take on all the extra responsibilities and worries just to make the same amount of profit. Let’s say that the founders of Boxes Direct 2 U want to make £12,000 a month after expansion.

To work out what they need, they add the fixed costs of £50,000 to the desired profitability level of £12,000, giving a total of £62,000. They then take this figure, divide it by 0.8 and arrive at £77,500 worth of sales a month.

Expand my business – business finance

Boxes Direct 2 U were making £4,000 a month before expansion. To achieve the type of growth they want as outlined above, putting aside £4,000 a month would mean they would probably have to wait years to fund the one-off costs of expansion and to hold enough cash in the company to ride out the time before they reach breakeven and then start making profits.

Looking at those numbers, I would personally recommend a loan of around £60,000 as a minimum. If they were able to secure this cash over 5 years at a 9.9% interest rate, their monthly repayments would be £1,259.45.

Expand my business – other routes

There are other routes – investment (for example, angels) and acquisitions. We’ll be covering them in greater depth in later topics.

Expand my business – how can Burton Beavan help?

Expanding your business requires intense planning and stress testing. If you choose to take a loan out to expand your business, you will more than likely be asked to personally guarantee the loan. If your expansion plans do not work out, the effect on your personal finances could be enormous.

Gareth and his team have helped many customers plan and fund their expansion. Please believe us when we say that, of all the times you need an accountant, this is it! Call the Burton Beavan team on 01606 333 900 or email us at hello@burtonbeavan.co.uk.