Growth can improve a business while also increasing financial risk. For owner-managed businesses and limited companies, testing whether larger premises are affordable should be reviewed before new fixed costs are committed. The key question is not simply whether sales can rise, but whether the business can fund the transition and still maintain a sensible margin.
Model the cost of growth before committing to it. Include the period between spending the money and receiving the additional sales the decision is expected to create.
Define the growth event clearly
In this case the event is signing a lease or moving into a larger office, workshop or commercial unit. Put a realistic start date, expected benefit and implementation period around it. Vague growth assumptions are difficult to test and easy to overestimate.
Calculate the full cost
Include more than the obvious headline cost. Relevant commitments can include rent, service charges, deposit, fit-out, utilities, business rates, insurance, moving costs and additional staffing or equipment. Some of these costs begin before the extra revenue arrives, so they need to be reflected in the cash forecast as well as the profit forecast.
Test the assumptions
Useful checks include cash reserve, committed lease term, forecast sales, break-even point and the time before the larger premises are fully utilised. Run a conservative case as well as the expected case. If the decision only works when every assumption is optimistic, the business may need more cash, a smaller first step or a different timing.
Monitor the result after committing
Create a small set of measures before the growth plan starts so the result can be compared with the expectation. Review sales, gross margin, cash and the new fixed cost regularly. That creates an early warning if the investment is taking longer to produce a return.
What to do next
- Define the growth event and start date
- Include one-off and recurring costs
- Model the delay before extra revenue arrives
- Run a conservative scenario
- Track the outcome against the original plan
Trade accountancy resources related to this topic
This topic is also relevant to the following specialist trade accountancy resources where the same accounting issue commonly arises.
Frequently asked questions
Why can growth create cash pressure?
New staff, premises, stock or equipment may need to be paid for before the additional sales generated by them are collected.
Should growth be judged only by turnover?
No. Margin, cash generation and the additional fixed cost are just as important as the increase in sales.
What if the growth takes longer than expected?
A conservative scenario and cash buffer give the business more time to respond without making rushed decisions.
Turn the figures into a clearer accounting process
DD Accounting can help with financial forecasting, management accounts, business planning and wider accountancy support.
This article provides general information only and does not replace advice based on your individual circumstances. Tax rules and reporting requirements can change.
