Assess your options for business growth

Sound financial planning is the foundation of any business growth strategy. Firstly, you should work out:

• how much investment you need
• when you will need it
• when it will be available
• how soon you will be able to repay it

Detail all the costs you expect to incur and compare them against the expected profits. Be practical and set realistic business goals to avoid disappointment.

Financial forecasts

Create a detailed cashflow forecast as outgoings often rise faster than income during growth. Include enough to keep the core business running, and build in some surplus too, since projects of this nature often run over.

As well as cashflow, work up forecasts regarding sales, working capital and sources of seed funding, or any subsequent funding. See how to tailor your business plan to secure funding.

Funding options for growth

Apart from bank finance, businesses looking for capital investment have three main sources:

• Equity finance is money invested in a business that is not directly repayable. It could be your own, most likely raised through remortgaging a property, or money from others taking a share in the ownership of the business.
• Venture capital is also known as private equity finance. Unlike business angels, venture capitalists look to invest large sums of money in return for equity in (ie a share in the ownership of) your business.
• Business angels are private investors taking a minority or majority stake in a business, often contributing valuable business experience in the form of advice and contacts.

There may also be some development or enterprise grants or loans available in your area.

Return on investment for growth

A common way of measuring the profitability of a business is by calculating the return on investment or ROI. This ratio tells you what percentage of return you can expect to get over a specified time. Many expanding businesses use three to five year timescales.

To determine your ROI, you should take the total investment figure, work out the increased sales for each year and the resulting net profit, and calculate that as a percentage of the investment.

For example, suppose a business wants to add a new product line. It will require an investment totalling £200,000 in development costs, plant, marketing and promotion. The new line should generate £400,000 in sales and £40,000 in net profit each year. The table below explains how to work out the growth ROI:

It's a good idea to test the ROI with different sales figures and factor in inflation. See also how to measure your financial performance.