Taking your business to a new market comes with a lot of risks but with that also comes the potential for huge rewards. After deciding to expand, it’s time for the next challenge: budgeting for that expansion.
Your budget needs to factor in the costs to expand while still maintaining your current level of business. Read on to learn how to create a business budget as you plan for your expansion.
Understand Your Current Financial Situation
Before you start looking at new office space or manufacturers, you need to make sure your business is financially prepared for expansion. You’ll need to take a hard look at the current state of your business financials. Ask yourself these important budgeting questions as you plan your expansion budget:
- Is my business profitable?
- Do I have any outstanding business debt?
- What is my current cash flow like? Does my business struggle with inconsistent cash flow?
Break down your current business budget and see if there are ways to trim expenses to free up more cash for expansion.
Once you know how much you can realistically expect to spend per month on expansion based on your current finances, you can consider the actual income and costs of your anticipated business growth.
Estimate Income Potential
After reviewing your current budget, it’s time to consider the reason you’re expanding in the first place: potential for increased revenue. Create a sales forecast to help you accurately determine the potential income from an expansion.
Use your existing sales data to help determine the potential income from your planned growth. For example, if you own a retail store and plan to open a location in a similar market, you can use your existing sales data to estimate revenue.
Be careful to not be overly optimistic in your sales forecast. It’s recommended that you run several different scenarios when creating a sales forecast. Try using the best possible outcome, average outcome and worst possible outcome to help you get an accurate range of the potential success of your expansion.
Identify Major Costs
Most major business expansions are expensive. To successfully break into a new market with a new location or product offering, you need to consider your major expenses as you plan your business budget.
List off every major expense related to your expansion. Start with the largest expenses and work your way down to smaller costs. The easiest way to stay organized is to use budget categories for each expense.
For example, you run a retail shop and are planning to open a new location across town. Some of your expense categories when planning the expansion could include:
- Facility costs
- Employee costs
- Inventory costs
Estimate spending for each category to get a general idea of the cost of your expansion. Your numbers can be flexible as they’ll become more concrete as you narrow down specific expenses.
Itemize Your Anticipated Expenses
You’ve got a list of your expected expense categories for expansion, and now you can begin itemizing within those categories for a more accurate cost. Don’t skip this step when deciding how to create a business budget to prep for expansion.
For example, some of your itemized retail store expansion expenses could be:
- Facility costs: Rent for the new location, decorating expenses, shelving and display costs, and furniture for employees/customers
- Employee costs: Hiring new employees, training programs and payroll taxes
- Inventory costs: Purchasing new merchandise and cost of storing inventory
Create an Expansion Budget
With all the potential income and expenses in place, you can start business budget planning for your expansion. Compare your existing finances, estimated income and expected expenses to set a budget. Your goal is to get estimated expansion costs below the potential income to create positive cash flow for your business. If your initial comparison comes out with a large deficit in cash flow, rework your expenses to try and cut costs.
Some expansion projects won’t be possible with your current income. In this case, you can look at financing options to get an infusion of cash to cover your growth expenses. Your retail expansion, for example, is expected to cost $50,000 and you can put $1,000 a month towards the project. At that rate, it would take 50 months to save up for expansion costs, which could increase in that timeframe. Instead, you could get a loan for the project that can be paid back using income from the new location.
Decide on Expansion Financing
Ideally, you’d be able to fund your expansion through your existing business income, but that’s not realistic for some businesses.
Instead of clearing out your cash reserves and opening yourself up to a crunch should any unexpected expenses arise, you should consider financing options, such as business credit cards, lines of credit or an online business loan.
Many business owners find that a business loan gives them the most flexibility for expansion. Try to find a lender who will work with you to create a loan program that fits your financing needs and business budget.
The Bottom Line
Learning how to create a business budget to expand doesn’t have to be difficult. By estimating realistic costs and income from the project, you can determine how much your business can afford to spend on the expansion and remain profitable.
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