Once a business is established with solid cash flow, the entrepreneur can start to think about growth and expansion.
Managed properly, growth can put the company on a different level and improve profitability through increased sales and a spreading of overhead charges. However, expansion can also be risky. Investing profits in the business or borrowing to fund growth brings no guarantee of a return, so business owners need to ask some searching questions before pursuing an expansion strategy. At this point on the development curve, it is worth revisiting the basics, comments Jonathan Perrin, Head of Vantis’ Hospitality & Leisure Group.
- How should I manage cashflow to fund expansion?
Hospitality businesses tend to underestimate the amount of capital expenditure required to open a new unit and are over optimistic about the time it will take to reach budgeted levels of income. This has a serious effect on the cashflow. Borrowing should be matched with the life of the assets acquired. The overdraft is for the management of the troughs in the cashflow, not a source of medium or long-term lending. With this in mind, equipment should be bought with the aid of asset-based lending and capital expenditure through a medium-term development loan. If the business model cannot support such levels of debt then seek further equity investment. Talk to a professional adviser who can help with the business plan and can be used to attract the required funds. A good adviser will be asking the right questions and playing ‘what if’ with the profit and cash forecasts. It is the best time to evaluate not only the capital that is required but also the working capital needed in the important start up phase of a new operating unit.
- Where can I find the right people to help me develop my business?
One of the main mistakes owner-managers make is to try to retain control over every aspect of the business. It's an understandable reaction when, in the start up phase, the owner-manager has no option but to do everything. However, if the business is to grow, new skills and expertise are needed. If accepting that other people can manage certain aspects of the business is difficult, finding the right person is even more difficult. Smaller companies may be unable to compete with larger organisations in terms of salary but there are other ways of attracting and retaining staff. Incentive schemes offering share options, for example, can be used to reward staff who hit their performance targets. It is vital to ensure that key members of the team have a financial stake in the future of the business.
- Which areas of my business should I invest in for the best return?
Owner-managers are closer to the business than anyone else. This can however have its disadvantages too, since their view of the business may not always be objective and impartial. They may be tempted to invest in the areas of the business they enjoy working on, rather than in those that promise the greatest profitability. The start-off point is in understanding existing return and margins. There are sector benchmark figures for food and beverage, revenues per room etc. Having reviewed the margins from accurate financial data, the best effort should be directed to improving those margins. The one that most hospitality businesses get wrong is the cost of labour. Naturally the labour cost percentage will fall if the same staff are utilised in an area of the business where turnover improves. Analyse the product mix and concentrate on the product and services that contribute most to the bottom line.
Whilst this phase in a business’s life is often termed ‘growing pains’ it is also the time when the entrepreneur looks back and either says “That’s when it all went wrong!” or “That’s when my business really took off and the time we started to create something worthwhile”. What will you be saying?
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