Guide

Assess your options for business growth

Financing for business growth

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

  • how much investment you will need to fund the venture
  • when you will need it
  • when it will be available
  • how soon you will be able to repay the capital

It's important to detail all the costs incurred in getting your growth option underway and compare them against the anticipated profits. You must be realistic and practical when setting business growth objectives.

Financial forecasts

A detailed cashflow forecast is essential, not least because outgoings are almost certainly going to rise sooner and faster than revenues. You must have enough money in the pot to keep the core business running. It's a good idea to build in some surplus too, as most projects always take longer to bear fruit than originally predicted.

As well as cashflow, you may need to draw up detailed forecasts regarding sales, working capital and sources of seed funding, or any subsequent funding. See how to use your business plan to get funding.

Financial investment

Businesses looking for capital investment, apart from bank finance, 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. Find sources of equity finance.
  • 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. Find out more about venture capital.
  • 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. Find out about business angels and how they operate.

There may also be some development or enterprise grants or loans available in your area. Search the Northern Ireland business finance and support finder.

Return on investment for growth

One of the most common methods of measuring the profitability of a business is 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:

Timescale

Additional net profit in period

ROI calculation (net profit/ investment x 100)

ROI (%)

One year

£40k

40k/200k x 100

20

Three years

£120k

120k/200k x 100

60

Five years

£200k

200k/200k x 100

100


It's a good idea to test the ROI with a number of different sales figures. While you may think additional sales could reach £400,000 a year, a number of factors - such as development problems, delays or sales and marketing issues - may result in lower sales in the early stages. You may also wish to adjust your calculation to allow for annual inflation.

See also how to measure your financial performance.