Columns

BUSINESS BRIEFS: Take the Risk Out of Your Next Expansion

August 1, 2009
/ Print / Reprints /
ShareMore
/ Text Size+

Have you ever wondered how a business that has been in existence for over 50 years suddenly fails? There are many reasons, but, surprisingly, one of them is growth. If improperly managed, growth can drain cash from your business and build risk into its operations. In the past, we have explored the cash-draining effects of growth. Today, let’s look at how growth-driven expansions can put your business at risk.

Figure 1. This business' revenue stream is cycling within its historic profit zone.

Expansion Scenario

Figure 1 illustrates a business with a revenue stream that is cycling within its historic profit zone (defined as the area between breakeven and capacity). In year A-B, the company experiences a growth spurt. Whatever the cause, the company’s potential sales are above its capacity, as evidenced by firming prices, extended lead times, and customers’ rejections of quoted delivery dates.

Figure 2. Expansion creates additional fixed costs.

What would you do in that situation? One possible option would be to expand capacity so that you could capture those lost sales and profits. However, as Figure 2 indicates, expansion creates additional fixed costs like new facilities and equipment, expanded energy and insurance needs, and even increased fixed staffing. These added fixed costs increase the breakeven point, which, given the sales profile in Figure 2, also increases the risk of losses.

Figure 3. It might be prudent to delay expansion until the downside of the sales curve rises above the projected breakeven of the expanded operation.

Consider Alternatives

One alternative would be to delay expansion until the downside of the sales curve rises above the projected breakeven of the expanded operation (see Figure 3). This allows you to capture the increased sales without incurring the downside of risk, which could prove devastating if sales were ever to follow line d-t in Figure 2.

Of course, having the patience to wait for one or two slowdowns to confirm the low end of the sales profile is a lot to ask of most managers, who see lost sales at the upper end of the chart. However, it’s not necessary to increase capacity in order to capture them.

Why not contract those sales out? When contracting, maintain control by bringing the product into your facility for quality assurance before shipping it to your customer. This will reduce your profit margin, but it will protect your reputation and the confidentiality of your customer base.

By focusing on the upside of your sales curve, you will identify opportunities for increased sales and profits. By focusing on the downside of the curve, you will identify the risks of unbridled growth. A good manager anticipates the bust as well as the boom.

Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.

Links

Did you enjoy this article? Click here to subscribe to Ceramic Industry Magazine.

Recent Articles by Thomas Maskell

You must login or register in order to post a comment.

Multimedia

Videos

Image Galleries

April 2014 Issue Highlights

Our April 2014 issue is now available!

Podcasts

Sapphire: An Extreme Performer

Ian Doggett of Goodfellow and CI Editor Susan Sutton discuss the benefits and opportunities provided by industrial sapphire.

More Podcasts

Ceramic Industry Magazine

CI July 2014

2014 July

Our annual Data Book & Buyers' Guide is your best resource for suppliers of materials and equipment for the ceramic, glass, brick and related industries. Check it out!

Table Of Contents Subscribe

THE CERAMIC INDUSTRY STORE

M:\General Shared\__AEC Store Katie Z\AEC Store\Images\Ceramics Industry\handbook of advanced ceramics.gif
Handbook of Advanced Ceramics Machining

Ceramics, with their unique properties and diverse applications, hold the potential to revolutionize many industries, including automotive and semiconductors.

More Products

Clear Seas Research

Clear Seas ResearchWith access to over one million professionals and more than 60 industry-specific publications,Clear Seas Research offers relevant insights from those who know your industry best. Let us customize a market research solution that exceeds your marketing goals.

Directories

CI Data Book July 2012

Ceramic Industry's Directories including Components, Equipment Digest, Services, Data Book & Buyers Guide, Materials Handbook and much more!

STAY CONNECTED

facebook_40px twitter_40px  youtube_40pxlinkedin_40google+ icon 40px