Considering business expansion

[AF-Beer]

Hi all

First post here and interested in some thoughts / feedback from the Group. I've grown an online business over the last couple of years or so from start up to current day - now up to c£700k turnover with Net Profit margin of 19% reducing to net c£75k post my own salary / pension contributions. The profit I am now mostly taking as dividends for tax efficient income. This has enabled me to leave my previous employment to focus full time on the business which has helped fuel growth.

60% of my products I produce myself with the rest outsourced. I work from home but have now ran out of space. There is no option to extend the property, I have maxed that out totally and have to also consider the goodwill of my wife and neighbours - also maxed out! Probably 60%+ of my time (maybe more) is focussed on low skilled labour tasks - picking, packing etc. So here is what I am considering:

1. Outsource some of the manual / low-skilled work - this can be done, but would drastically impact profit - perhaps by 33% and I am concerned over quality / competitive considerations and least favour this option, albeit it would provide time freedom and flexibility.

2. Rent an Industrial (maybe up to 1000-1400 square feet - this will solve my space problem, and enable me to consider automation / machinery which I could initially operate myself to save time - probably buying machinery with cash from the business. Rents are extremely high in my area though - average of £14 per square foot, with rates, utilities etc. it might cost c£20-25k to do this - quite a dent on my profit and cash. Also, potentially employ someone on zero contract hours - cost of a unit and person likely similar to outsourcing cost.

3. Keep the business running at maximum capacity from home - build more product lines which I can outsource and let more cash build in the business.

I am worried about eroding cash flow, I like to have lots of free cash in the business. I have many products and channels yet to launch. My ultimate aim at some point is to conduct an Exit through sale so I am also thinking that an Industrial Unit might make a sale more challenging - unless I insist on a business acquisition buy-out clause or alike.

Appreciate there is a lot here, but would be happy to hear some thoughts and challenges.

Much appreciated.

AF-Beer

 

[tony84]

Can you not get a commercial property a little further out or in a different direction where it might be cheaper?

When I have looked at offices, I have a choice of do I want on a trading estate and it be cheaper or do I want in the local village centre where it is more expensive. Or I could have get a farm out building for even less - basically options depending on what I want/need.

 

[AF-Beer]

Can you not get a commercial property a little further out or in a different direction where it might be cheaper?

When I have looked at offices, I have a choice of do I want on a trading estate and it be cheaper or do I want in the local village centre where it is more expensive. Or I could have get a farm out building for even less - basically options depending on what I want/need.

Thank you for reverting - so right track on the unit idea but focus on getting the price down and finding something cheaper?

 

[WaveJumper]

Couple of things from me when someone says they "mostly take dividends" I think their business is not ready to pay them the salary they really hanker for, if the profit line goes down due to higher overheads etc etc I would suggest relying on getting dividends out the company suddenly diminishes and worse case if expansion flatlines there could be none to take.

Personally I would look to be "mean & lean" (this year) cash is going to be king in my book as government are trashing the economy things could be turning pretty ugly pretty quick in 2025 the signals are not looking very favourable ....... don't get caught with your trousers round your ankles

 

[AF-Beer]

Couple of things from me when someone says they "mostly take dividends" I think their business is not ready to pay them the salary they really hanker for, if the profit line goes down due to higher overheads etc etc I would suggest relying on getting dividends out the company suddenly diminishes and worse case if expansion flatlines there could be none to take.

Personally I would look to be "mean & lean" (this year) cash is going to be king in my book as government are trashing the economy things could be turning pretty ugly pretty quick in 2025 the signals are not looking very favourable ....... don't get caught with your trousers round your ankles

Some great points thank you. I agree on the economy, which made me think it could give me leverage on any rent negotiation (properties aren't shifting right now) but the worst case - higher overheads and profit diminishing is the big concern and can't really be mitigated right now.

 

[LPB 123]

Hi all

First post here and interested in some thoughts / feedback from the Group. I've grown an online business over the last couple of years or so from start up to current day - now up to c£700k turnover with Net Profit margin of 19% reducing to net c£75k post my own salary / pension contributions. The profit I am now mostly taking as dividends for tax efficient income. This has enabled me to leave my previous employment to focus full time on the business which has helped fuel growth.

60% of my products I produce myself with the rest outsourced. I work from home but have now ran out of space. There is no option to extend the property, I have maxed that out totally and have to also consider the goodwill of my wife and neighbours - also maxed out! Probably 60%+ of my time (maybe more) is focussed on low skilled labour tasks - picking, packing etc. So here is what I am considering:

1. Outsource some of the manual / low-skilled work - this can be done, but would drastically impact profit - perhaps by 33% and I am concerned over quality / competitive considerations and least favour this option, albeit it would provide time freedom and flexibility.

2. Rent an Industrial (maybe up to 1000-1400 square feet - this will solve my space problem, and enable me to consider automation / machinery which I could initially operate myself to save time - probably buying machinery with cash from the business. Rents are extremely high in my area though - average of £14 per square foot, with rates, utilities etc. it might cost c£20-25k to do this - quite a dent on my profit and cash. Also, potentially employ someone on zero contract hours - cost of a unit and person likely similar to outsourcing cost.

3. Keep the business running at maximum capacity from home - build more product lines which I can outsource and let more cash build in the business.

I am worried about eroding cash flow, I like to have lots of free cash in the business. I have many products and channels yet to launch. My ultimate aim at some point is to conduct an Exit through sale so I am also thinking that an Industrial Unit might make a sale more challenging - unless I insist on a business acquisition buy-out clause or alike.

Appreciate there is a lot here, but would be happy to hear some thoughts and challenges.

Much appreciated.

AF-Beer

Well done on what you have done so far.

IMO you need to work on the margin. If you're left with 10% at year end (wages and contributions included) seems a little low when working from home and you have no staff or premises costs etc.

Make a plan on how much the unit, rates, staff etc would cost. Then work out how much extra sales you'll need to cover these overheads with your current margins. Once you have done this I think you'll see that you need to work on the margin first.

When you have worked on your margin, if it was me I would then definitely go for number 2. You get staff to work on the picking, packing and that stuff so you have more time to focus on growing the business.

 

[PA Debt]

I would look at increasing your prices to reflect the additional costs involved in taking on these future overheads, this way you will test the market at what will soon be your new prices to see how demand is affected.

Good luck

 

[AF-Beer]

Well done on what you have done so far.

IMO you need to work on the margin. If you're left with 10% at year end (wages and contributions included) seems a little low when working from home and you have no staff or premises costs etc.

Make a plan on how much the unit, rates, staff etc would cost. Then work out how much extra sales you'll need to cover these overheads with your current margins. Once you have done this I think you'll see that you need to work on the margin first.

When you have worked on your margin, if it was me I would then definitely go for number 2. You get staff to work on the picking, packing and that stuff so you have more time to focus on growing the business.

Thank you, a plan / forecast is a solid suggestion.

 

[AF-Beer]

I would look at increasing your prices to reflect the additional costs involved in taking on these future overheads, this way you will test the market at what will soon be your new prices to see how demand is affected.

Good luck

Thank you. I have played around with pricing - I find that a slightly lower margin generates more revenue and ultimately more profit - albeit for more effort. Issue with operating at the lower level is it doesn't leave anywhere to go!

 

[WaveJumper]

And something else to think about when working from home you may well not be on a business rate for internet and your utilities, once in a unit you might get a bit of a shock at what they are charging for electricity and an internet connection can be a real killer so as other have commented do your sums best of luck and keep us all posted on hoe you get on

 

[cjd]

Thank you. I have played around with pricing - I find that a slightly lower margin generates more revenue and ultimately more profit - albeit for more effort. Issue with operating at the lower level is it doesn't leave anywhere to go!

You're obviously at a transition point. It's very difficult to predict what will happen if you move from this 'home hobbyist/lifestyle' business to a small 'professional' business with employees, premises and machinery. One thing you can predict with certainty though is that your costs will increase enormously - far more than you may think now.

You are able to have low prices because you're not charging the normal overheads of a business to your products - rent, rates, heating, lighting, telephone, insurance, internet, depreciation, professional fees etc etc etc.

If, as you say, the price of your product is very elastic - ie sales vary in a fairly direct proportion to your prices - then raising prices to cover these extra costs won't work.

You do need to build a proper business plan using really pessimistic costs and forecasts and prove to yourself that it works. Get the spreadsheets out and talk to your accountant they're a great source of knowledge about real business costs - you do have an accountant?

 

[AF-Beer]

You're obviously at a transition point. It's very difficult to predict what will happen if you move from this 'home hobbyist/lifestyle' business to a small 'professional' business with employees, premises and machinery. One thing you can predict with certainty though is that your costs will increase enormously - far more than you may think now.

You are able to have low prices because you're not charging the normal overheads of a business to your products - rent, rates, heating, lighting, telephone, insurance, internet, depreciation, professional fees etc etc etc.

If, as you say, the price of your product is very elastic - ie sales vary in a fairly direct proportion to your prices - then raising prices to cover these extra costs won't work.

You do need to build a proper business plan using really pessimistic costs and forecasts and prove to yourself that it works. Get the spreadsheets out and talk to your accountant they're a great source of knowledge about real business costs - you do have an accountant?

Thank you. Yes I do have an accountant so will see what modelling / sensitivities they can help with.

 

[Paul Kelly ICHYB]

Outsource some of the manual / low-skilled work - this can be done, but would drastically impact profit

Yes, it will allow you to grow without greater personal stress - indeed, it could make your life much easier.

At the moment you are paying yourself to do the work, all you then do is pay someone else!

Rent an Industrial (maybe up to 1000-1400 square feet -

If you have a good track record, proven sales & growth, this could be a good idea, however, you are burdening yourself with costs and risks outsourcing wouldn't give you.

Rents are extremely high in my area

Go outside your area!

Keep the business running at maximum capacity from home

So, as you know, outsource or expand to dedicated premises!

I find that a slightly lower margin generates more revenue and ultimately more profit

and more work, so probably not worth it. Calculate that is your prices went up by 5% and sales dropped by 5% would you be better off. Understanding supply & demand basics could be good here.

You are able to have low prices because you're not charging the normal overheads of a business to your products - rent, rates, heating, lighting, telephone, insurance, internet, depreciation, professional fees etc etc etc.

Spot on.


Without knowing what the product is and its production process, it ios hard to say which is a better way to go!

BTW, separate your salary from your dividends - you are paying yourself to do a job and your time. Dividends are from the success of your business. If you pay someone else to do the job, bou buy time to focus on something more profitable - running and growing your business.

Maybe the solution is stay where you are - it's not a bad return!

 

[Mark T Jones]

I haven't read all the replies so may be duplicating

First step - always - is to do some detailed projections, taking into account all variables. I'm sure you are aware that there are a lot more costs to business premises than just rent.

Post covid there was a spike in online business who had done well in lockdown looking to go into B&M premises (some retail, some warehouse)

Apart from costs, many were detered by the shift from home convenience to having staff and responsibilities

Many others by concerns over the longevity of the business itself (it's a slightly different environment, as they had seen a boom and were witnessing a downturn)

Good projections bring out these challenges

 

[AF-Beer]

BTW, separate your salary from your dividends - you are paying yourself to do a job and your time. Dividends are from the success of your business. If you pay someone else to do the job, bou buy time to focus on something more profitable - running and growing your business.

Thank you for your detailed responses and challenges - most helpful. This comment in particular (along with paying myself or someone else to do the work have really got me thinking. I've been minded that the best way to remunerate is the most tax efficient - so paying the minimum tax free amount along with salary sacrificed into pension - net result no tax / NI, then taking dividends over and above those 2 elements - so paying what ultimately works out to be a more efficient structure. If I just paid outright as salary, the cash-flow would be greater to result in the same 'take-home' unless I am missing something?

 

[AF-Beer]

I haven't read all the replies so may be duplicating

First step - always - is to do some detailed projections, taking into account all variables. I'm sure you are aware that there are a lot more costs to business premises than just rent.

Post covid there was a spike in online business who had done well in lockdown looking to go into B&M premises (some retail, some warehouse)

Apart from costs, many were detered by the shift from home convenience to having staff and responsibilities

Many others by concerns over the longevity of the business itself (it's a slightly different environment, as they had seen a boom and were witnessing a downturn)

Good projections bring out these challenges

Thank you, and yes I agree - forecasts seem to be of paramount importance here.