Expanding Business? Take care
Expanding a medium size business needs to take care of certain tricky problems like expanding business vs infra-structure for increased activities and safety of capital already earned. .
Any business is run to make money, of course, in a fair way. Once a business starts earning money, the owner wants to make more money! He realises soon that expansion or diversification of activities are the solutions. This invariably needs infrastructure which in turn needs further investment.
Expansion of activities also means a bigger uncertainty in revenues. Any unnecessary investments in infrastructure might eat up on the profits and liquidity, including that of the current business. While, without taking business risks, it is close to impossible to expand business, an expansion without proper infrastructure is suicidal. Therefore the owners have to adequately balance strategy between expansion of business and additional costs of larger infrastructure.
4-5 decades ago, our family business went through a similar balancing act or lack thereof. The reasons stand good even today. My dad owned iron ore and manganese mines. He was as good at looking for and selecting remunerative mines as he was at obtaining Government permissions to operate those mines. He started with a small mine of a few acres and expanded to 9 mining leases. From the records, I found out after his death that just two of them were as big as 1064 acres! These could have been sources of unimaginable and unlimited revenues.
He was the lone manager of this enterprise. Infrastructure for expansion was not planned. We, all his sons, were still students. Management was not adequate and therefore the controls on the resources were inadequate. If controls are missing, the funds would go missing too! The entire business turned out to be unremunerative whereas it should have earned multi-millions. It was all due to inadequate infra-structure.
My son Anand, who earlier was in UK, took over operations of my business over a year ago. He wanted to expand and diversify the business. His first thought was about infrastructure. He spent almost a year in planning and building additional infrastructure for future activities and wisely limited it within affordable means. We occasionally felt that the business could be managed without additional infrastructure, but learning from my dad’s experience, I was very happy to support him.
I have seen some not-very-large businesses that they were very successful when they were small, but failed miserably when they expanded. On analysis, it was clear that the main reason for their failure was that only the value of fixed assets was taken as investments and funds for expansion were arranged accordingly. The need for working capital for day-to-day activities and transition costs were ignored. This is extremely important and is a significant amount in most businesses.
A businessman I know, failed to notice another significant problem. “When one heads towards the top at top speed, he had to ensure that he doesn’t drop down”. At whatever height one is, it is a human tendency to assume that the peak is yet to come. But one cannot judge when one is at his peak. Therefore, to be safe, at every stage of climbing, one should secure themselves from a fall.
How do we secure that? Simple, set aside a good percentage of earnings for a rainy day, a saving for safety from failures. Do not put entire capital at risk. For any reason, if expansion investment is lost, at least you are left with a base capital to survive for future.
These are some of the lessons learnt while analysing the reasons for failures of some of the prosperous businesses while undertaking expanded activities.
Written: Badri Baldawa
Edited: Meeta Kabra