As with many things in life, size isn't everything. You may be better off, both financially and emotionally, staying as a small business.

Growing your business may make you wealthier and give you increased status (if that's what you're after). But growing a business involves plenty of difficulties that should give you pause for thought:

  • Increased borrowings. You'll probably need extra short-term funding to pay for more office space, extra computers, more stock and so on.
  • Increased staff. Your abilities as a manager of people will be severely stretched as you start to increase the number of staff. You will have to learn new skills of delegation, dispute resolution and motivation.
  • Where's all my cash gone? Growing businesses can often experience rapid increases in sales and profit, but show a reduction in cash generated. At its worst, this reduction in cash flow can lead to insolvency and business failure.
  • Extra stress. There is so much more to do! More personnel issues, more poorly paying customers, more crashing computers – they all add up to more stress.
  • More bureaucracy. As the business grows, so does the pile of paperwork and you may need to invest more of your scarce cash in bigger and better systems in order to deal with it.

If you relish the challenge of all of the above, then go for it. But if you're wondering whether or not you can face it, don't worry. There's absolutely nothing wrong with continuing to be a successful small business.

Expanding your problems

Spending your way out of trouble is a very high risk strategy. Nevertheless, people often think that expansion will solve the problems of a business that is making a loss. For example, you might think that opening another branch or shop will increase your profitability because:

  • you'll achieve economies of scale by negotiating lower prices from your suppliers (you'll be buying twice as much stock, remember)
  • there'll be two shops paying for your salary.

However, you're unlikely to achieve significant economies of scale until you have your seventh or eighth shop. And if your business is working on such thin profit margins, you should do some more fundamental analysis first – for example, review your product mix and your pricing strategy.

Secondly, the fact that your salary will be paid by two shops may be an illusory benefit. If you can only spend half your time at each shop, perhaps you'll need to employ full-time managers to cover in your absence. If you don't, it's unlikely that the shops will operate at full efficiency.

It's best only to expand if you're already running a profitable business. If you're making a loss, focus your efforts on turning the business round first.

A solid base

Don't think about expanding until your business systems are sound. Make sure that you address the following before you contemplate growth:

  • Human resource management – that's contracts of employment, job descriptions, induction procedures, training programmes, staff appraisals, employee records, an efficient PAYE system and a clear organisational structure. It may be appropriate to be approved by the Investors In People quality standard.
  • Financial controls – you should consider preparing annual budgets and monitoring the performance of the business against the pre-set targets.
  • Operational controls – that is, IT systems, backup and support, quality control and regular supplier reviews.
  • Marketing – how are you monitoring the success of different promotional methods? Do you have a detailed marketing plan for the year?
  • Planning – have you planned your expansion properly? You need to monitor the progress of these plans, and it might be useful to find a mentor or advisor to help you with your expansion.

You may think that you can expand without addressing the above, because you run your existing business that way. However, it isn't a coincidence that all big businesses have adequate systems and many small businesses don't. If you want to go from one to the other and stay there for any length of time, you'll have to accept this and embrace it.

Running out of money – overtrading

One of the most common causes of business failure actually occurs when you think you're doing brilliantly.

Rapidly growing businesses often experience substantial increases in sales and profit, but a decrease in cash flow. This decrease is known as overtrading and is caused by two things:

  • A tendency to grant attractive credit terms to entice big new customers. This increase is not matched by an increase in credit terms from suppliers and can result in an acute short-term cash flow crisis.
  • The requirement to invest in new assets, such as premises, vehicles, machinery, computers and so on.

If you are having problems, then using the services of a debt factoring company is just one of the ways in which you can address them.

Diversifying into something you know nothing about

Very few of us are multi-talented. What makes a successful architect open up a restaurant, or the recruitment agency move into technical consultancy? And why do so many Brits with no previous experience want to move to the Mediterranean to work eighteen hours a day in their own bar? Is it because they want to make more money, or simply that they're bored?

Big businesses diversify all the time. Richard Branson's Virgin group has established many unrelated businesses. However, Virgin has the benefit of a hugely strong brand, which gives each new venture a style already recognised and appreciated by customers.

As a small business, without a strong brand, you should think long and hard before you diversify into unknown territory.

If you're bored and in need of a fresh challenge, perhaps you should consider expanding your business into e-commerce, buying one of your competitors to increase economies of scale, or, better still, taking a sabbatical to go and write that novel.

Start doing the things you hate

"But I like making clay pots and I hate managing people."

It's easy to forget that growing your business means spending more time managing than doing. Some people like this; others end up missing their craft and bemoaning the fact that they have to deal with all the hassles of running a larger business:

  • managing people
  • entertaining clients
  • schmoozing the bank manager
  • dealing with the auditors.

If, like so many others, you find that managing finance and people has turned out not to be one of your greatest strengths, then you have the choice of either going back to being a smaller business or getting help and training in small business management.

Alternatively, you can employ the services of a business mentor or a non-executive director. They can help to brainstorm some of the strategic issues and allow you to spend a bit more of your time going back to doing the things that you enjoy.

Where's the exit strategy?

Finally, if you're planning on retiring in the next three to five years, you need to think about your exit strategy now.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.