Deciding to expand your business can be a risky proposition, and it’s better to have some hard metrics to work from rather than a gut feeling. Whether you’re seeking to open a new location, add an online store, enter a new market, or launch a new product line, these indicators can help you reach the next phase of growth with confidence.
Revenue and profit margin
If you’re struggling to meet demand, that’s a good sign it’s time to expand — either by bringing on more staff or opening other sales channels. Revenue and profit margin are two indicators that can tell you if you’re ready to grow: Consistent, double-digit year-over-year revenue growth for several years could indicate demand exceeds your capacity. Likewise, increasing profit margins despite rising costs may suggest that your operations are at peak efficiency and are ready for expansion.
“But make sure to track the numbers, because having a crazy-good month isn’t the same as sustained demand, especially if it coincides with the holidays or a special event,” wrote Square.
Customer retention and acquisition
Customer retention is like a golden ticket for growth. Consider these statistics:
- Increasing customer retention rates by 5% increases profits by 25% to 95%.
- Acquiring a new customer can cost between five and 25 times more than keeping an existing one.
- Repeat customers spend 33% more than first-time customers.
If your customer retention rates are consistently increasing, it’s a good indication that your loyal customers will continue to frequent your business even as you grow — fueling your long-term success.
Customer acquisition costs can also tell you whether you’re ready to expand. Declining customer acquisition costs relative to lifetime value might point to successful marketing strategies and scalability. You may also see feedback on social media or online review sites from customers requesting that you sell in a specific area or sales channel. Use that qualitative feedback alongside your acquisition data.
[Read more: 3 Signs You're Ready to Expand Your Products and Services (And How to Get Started)]
If your customer retention rates are consistently increasing, it’s a good indication that your loyal customers will continue to frequent your business even as you grow.
Cash flow
Consistent positive cash flow is another signal you could be ready to grow. “If the ratio between best results and worst results is narrow, your business probably has a healthy consumer base and evidence of repeatable sales. These signs are indicative of prosperity and suggest it’s time to scale,” wrote Bplans.
Healthy cash flow, along with savings, provides the financial safety net you need for investment and growth. If you plan to apply for additional financing, lenders and investors will also look for a low debt-to-equity ratio and the level of financing you need to support your expansion costs. Cash flow can go a long way to making your case.
Overall market trends
“Take a look at the landscape for your industry: Is the market saturated? Or are you just scratching the surface? If you have little competition and a large, untapped customer base, you have better odds for successful growth,” wrote Square.
To quantify the market potential of your expansion, identify growing market segments or emerging trends aligned with your offerings. Analyze competitor activity and market saturation to assess room for your business to carve out a larger share.
Capacity metrics
Sometimes, expanding is an absolute must, simply because you’re running out of space. Employee headcount, inventory, and utilities can all tell you if you’re running at full capacity in your current state.
If you see signs of employee burnout even if you’re hiring to keep up with demand, consider how expansion can alleviate that pressure. You may also look at your rate of online sales or how you’re currently utilizing the square footage of your space to understand where to restructure.
[Read more: Expert Advice: How to Expand Your E-Commerce Online Sales Channels]
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