A version of this article was previously published in the August 2018 edition of the San Diego Business Journal.
It’s important for owners both to initially consider and then continue assessing their company’s ideal size as the business environment changes.
While some growth can be anticipated, bringing with it additional profitability and success, unexpected growth can at times be challenging. If owners aren’t prepared to handle this type of growth, it could end up costing their business money.
There are many ways to quantify the size of a business, and in the construction industry, gross revenue is often used to measure size. Using this metric, this article discusses ways to help owners prepare a more sustainable growth plan and deal with the unexpected.
There are major costs and other challenges to consider when planning to grow a business. The following questions can help guide the decision-making process.
Is there enough business or work in the local or regional area to support desired revenue growth?
Consider upcoming projects and where they may be located. If they’re outside the local area, consider these additional costs:
- Travel and lodging
- Additional compensation
- Vehicle usage and fuel
- Temporary workforce
Should a new location be opened?
There are advantages to establishing an office in a new location, such as:
- Providing a local space for employees, customers, vendors, and subcontractors to meet
- Enhancing company visibility
The costs of additional office space and overhead can be a significant burden, however, especially when starting a new location. Specific costs could include the following:
- Rent and utilities
- Computers and IT support
- Underutilization of local workforce—especially before the location has a full workload
To quickly quantify the volume of work needed to offset the additional overhead burden, divide the total amount of additional cost by the company’s gross margin.
For example, a new office location may cost $500,000 per year to operate while a conservative estimate of the gross margin generated from contracts in the area is 15%. By dividing total cost by gross margin, it’s determined that approximately $3.3 million in revenue would need to be generated to offset the cost of the new location.
What level of profitability can the business sustain?
If growth requires taking on larger contracts, a company will need to assess its ability to properly manage and oversee them. Larger contracts can each have a more significant impact to a company’s profitability and cash flow than smaller jobs management may be more familiar with. It’s also important to consider the increased risk of being able to complete contracts efficiently while working in a new location with additional customers and a new workforce.
What does the competition look like?
As a company grows and bids on larger projects, there are often fewer entities competing. However, those businesses may already have a local presence as well as experience working within the size and scope of larger contracts—and with the customers that put those projects out to bid.
Because of these factors, a growing company may need to lower its margins to stay competitive with more efficient competitors.
What laws, regulations, and other challenges may impact growth?
There are often overlooked challenges when expanding into new locations, including laws and regulations that can differ by location and by state. Maintaining an awareness of these rules can help mitigate costly mistakes.
Establishing a strong employee base is also critical when expanding in an economy where finding skilled workers is difficult and a company can be seen as a new and unknown employer.
Planning for Growth
After considering the challenges, a company will want to choose its goals and determine how to achieve them. Here are a few items to consider when writing a growth plan:
- How much capital and borrowing capacity the company has and if it’s sufficient to sustain expansion costs
- Cash-flow projections based on a conservative growth plan—determine how much capital will be needed and how long it’ll be deployed and otherwise unavailable for use in existing operations
- Incentives available for the expansion, including tax benefits for purchasing vehicles or equipment as well as other tax benefits that may help defray the capital investment
- How the growth plan aligns with the owners’ personal financial plans—outline short and long-term personal goals to determine what’s needed from the business and its value to meet them
Once a plan is in place, continue to monitor budget or projections and compare actual activity to planned activity each month on a timely basis. Immediately identifying problems or errors in a plan’s estimates can help a business stay on track to meet its growth goals.