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Does it make sense to invest in business expansion? Yes – if you’re careful.
Interest rates keep climbing, fears of recession are still hovering over the economy, and inflation – while cooling slightly – is still the highest it has been in years. Add in a job market where openings outnumber unemployed people, and right now is obviously … the perfect time for business expansion?
It’s a proposition that more and more business owners are considering. Even though we’re in the middle of unpredictable and challenging times, there still seems to be strong demand from consumers and businesses across several verticals. Waiting until everything is “safe” again might mean missing out on tempting opportunities for growth.
While global business leaders are negative about the overall economic outlook, over 68% expect their company’s revenue to increase over the next several months, according to C2FO’s 2022 Working Capital Survey.
Business experts and academic research both say it’s possible to successfully pursue business expansion during an unsettled, unpredictable economy, but it takes careful planning and judgment.
“A recession or challenging economic situation should be viewed as an opportunity as well as a threat, and companies need to be preparing strategies that reflect both parts of this now,” said Mark Thomas, C2FO’s COO for the EMEA region.
You’ve probably heard that “fortunes are made during recessions.”
Employees with an entrepreneurial streak may decide to venture on their own and start new businesses. And because many existing companies are either shrinking or closing, there is less competition in the marketplace, too. Forward-thinking companies may be able to negotiate better deals from suppliers, boosting their bottom line.
While there’s a lot of truth to that narrative, the full picture is more complicated.
In 2010, researchers at Harvard Business School and Northwestern’s Kellogg School of Management looked at how 4,700 public companies fared during three recessions: 1980-82, 1990-91 and 2000-02. They found that …
Going into starvation mode was a loser. Companies that cut costs quickly and deeply were the least likely (21%) to outperform competitors when the recession was over. When businesses had this type of “prevention focus,” they were able to protect their margins, but growth stalled because the company had a siege mentality. By doing more with less, product quality suffered, and so did company morale.
Blindly investing in growth wasn’t magic, either. Only 26% of companies that outspent competitors would go on to become market leaders. These “promotion focus” businesses tended to take it on faith that investment would always lead to growth. As a result, they were less likely to see the warning signs that things weren’t working out.
The best-performing companies cut costs while also investing in growth. About 37% of those companies would end up outperforming their competitors by at least 10% in top-line and bottom-line growth. These “progressive companies” invested in an array of strategies, including more R&D, more marketing and more assets. They were also judicious about where they cut costs. They would lay off employees, but they did so much less often than “prevention” companies would. Instead, they focused on improving operational efficiency so their businesses could keep generating revenue.
“This is the time to review costs,” C2FO’s Thomas said. “However, this is not about cutting costs related to long-term growth. It is about ensuring that costs are sustainable and focused on the right areas.”
“Recessions have historically provided an opportunity for companies to grow and take market share if they select and capture the right opportunities.”
It depends on the business and industry, but in a recession, M&A opportunities can accelerate growth while creating opportunities to change the direction of a business, Thomas said.
“Companies should be identifying attractive M&A targets early and ensuring that their balance sheet is healthy enough to execute quickly, as recessions provide the opportunity to acquire businesses at lower prices, positioning themselves well for a recovery,” he said.
If a business wants to invest in growth during a challenging period, what should they do to make sure they aren’t overextending themselves financially?
“All companies should currently be undertaking a strategic review of their balance sheet to prepare for uncertainty and a higher interest rate world,” Thomas said.
“This could involve changing capital structures or divesting underperforming or nonstrategic businesses. Scenarios should be run to ensure that the business is in good shape to survive but also to ensure that it is able to take advantage of any opportunities that arise in the future, e.g. M&A.”
It can also help to maximize cash flow to help pay for the cost of new investments or new hires. C2FO’s working capital platform allows businesses to receive early payment on their outstanding invoice, in exchange for giving customers a small discount. It’s essentially on-demand capital, available on more affordable and more convenient terms than what’s available from traditional lenders.
Businesses can and should continue investing in expansion during a tough economy, but they need to think strategically when they do so. Invest in R&D, marketing and assets, but don’t invest blindly – be willing to halt programs that aren’t producing results.
And fight the temptation to survive a recession by “starving your business.” Over the long term, it’ll destroy your ability to compete when the economy improves.
Looking for working capital to help fund your business growth? C2FO’s suite of solutions can boost your cash flow quickly and affordably. Learn how.
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