Booming Business Basics

• In theory, every business wants to expand quickly and make bigger profits as soon as possible. In practice, expansion changes the nature of a business and brings its own problems. Business owners need to plan carefully for how they will deal with this expansion and the potential pitfalls.

Physical Expansion

• A business that begins selling more goods or services at a rapidly increasing rate may come up against physical limitations. These include running out of stock, warehouse space or office space. This can be a particular problem where the company is tied to long-term property leases.

Personnel

• The larger a business becomes, the harder it is for the owner or owners to maintain complete control over operations. This makes it particularly important to set up an effective management structure with authority delegated to trusted employees and middle managers who report effectively on business activities.

Cash Flow

• A rapidly expanding business will often come across cash flow problems. This is different from making a profit and loss: cash flow is about when a business receives and spends money, rather than whether it makes more than it spends. The larger the amounts of money a company deals with, both revenues and expenses, the more likely it is that cash flow can become a problem; for example, when clients take time to pay for delivered goods or services.

  Using debt factoring is one way around this. This is where a finance company buys the rights to the business's unpaid customer invoices at a discount. The finance company then collects the money from the customers. The benefit to the business is that it gets the money immediately rather than having to wait for customers to pay, improving cash flow. The drawback is that the business only gets a portion, for example 80 percent, of the total invoice amount.

Incorporation

• People who run their own business or have a partnership may consider incorporating the business. This turns it into a company that exists as a separate legal entity, while the owners become shareholders. The biggest advantage is that the owners gain limited liability. This means that in the event the business fails, the owners can only lose the money they originally put in the company; creditors cannot pursue them personally for the company's debts. Incorporation also means profits are taxed through corporation tax rather than through the income tax of the individual owners. Depending on the state's rules, this will often lower overall tax payments.

Stock Flotation

• The ultimate expansion step for a company is a public flotation. This means that the company issues new shares that can be bought and sold by the general public through a stock exchange. The money spent by investors buying these new shares then becomes available to the company to fund future operations. "Going public" in this way is a complicated matter and requires expert assistance.