The key question for any established business is why expand, however most business do expand on a daily basis without realising that this is taking place. This expansion could be as simple as encouraging reordering from existing customers to expanding the customer base. In fact Hall et al (1997) argues that firms must grow to survive and failure to grow may result in the loss of competitiveness with a decline in demand and eventual closure.
Before any growth or planned expansion in the business takes place consolidation of the existing shop with a clear idea of how it is managed and run would be a sensible course of action to take. The importance of planning before and what growth steps are taken could make the difference between success and failure. These plans need to include cash flow and profit and loss forecasts, a clear idea of current skill base in management and staff and a clearly defined strategy.
It is important to base a strategy on the information available from the first shop, historically losses are heavy on expansion, are these losses acceptable and can the original shop support both ventures whilst this negative income period is passed and if there is a problem with customers at the original venture is there enough cash in reserve to carry the two shops.
Problems with existing customers can be influenced by forces outside the control of the owner, these may be economic (interest rates, inflation), political (policies, taxation) or changes nationally in buying patterns this again would mean the need for cash reserves to carry the shops if there are any problems. The real question is why expand, the shop currently pays a reasonable salary to the owners and still makes profit each week.
If Jason and Emma wanted to increase profitability overall it would be better to put off expansion and concentrate on the cost of sales at the shop, a small saving here could make a big difference to the total net profit margin. To help control costs a few key points should be considered, Cut Costs – by controlling simple everyday costs and reducing time spent on tasks that can be mechanised or simplified. This would free up management and staff time to concentrate on increasing sales.
Sell more – Jason spends a lot of time with administration, if this task was sub contracted out then he could spend time on the premises controlling stock levels and staff, with close contact with Emma the buyer, stock ordered could be monitored on a daily basis this would increase profitability on stock held and the amount of money tied up in stock. Growth by selling more without expanding the business externally is known as organic growth. Increase prices – the barrier for increasing prices is the type of customer they have and how they perceive the companies products.
If the product could withstand a price increase it would only need to be small as this would improve the overall net profit margin. Overall my suggestion would be to maximise the current shop before expansion. Once this is achieved growth through self financing shops would be a far better way to expand. Logistics If a business trades from a single premises the possibility of delivery and sales problems are confined. If there are more than one premises there are several problems that can occur. With any business the product unless manufactured needs to be delivered. In the case of Jason and Emma, Emma goes out and buys for the company.
It is usual for the company that you buy from to deliver to the premises that you specify, that is if the stock is enough for them to deliver to each of your premises, however if there is not a sufficient quantity ordered or the supplier insists that all orders must be delivered to one property to qualify for a bulk order discount then there is a problem with distribution. Is the current shop big enough to hold the stock when its delivered, if it isn’t then there will be a need for a warehouse and this would mean additional costs (insurance, security, staff, rent or buy etc).
these cost would need to be worked out well in advance of any expansion as any additional costs would need to be recovered through sales. There would also be a problem with delivering to each shop, as deliveries would need transport, suitable transport would need to be purchased and a driver employed, these are all added costs. If a full time driver was employed and suitably sized transport bought then perhaps a further discount could be sought from the supplier if collection was arranged rather than they deliver, this would help recoup some of the costs involved in running a warehouse.