Things seem to be going well in your business. You’ve had more work than you can handle for an extended period of time. Demand for your services has been increasing steadily. This is, of course, a good scenario. Yet you can’t help feeling that you’re missing an opportunity if you don’t increase your productivity to meet potentially increasing demand. If you do decide to expand your business to take advantage of the potential opportunity, how should you best go about making it happen?
Several options are open to you, each with its own set of risks and prospective rewards. We’ll look into several of these and see what needs to be considered before moving forward.
One solution is to sub-contract work to other woodworkers. The risks are relatively low but you do need to be concerned about the dependability of the woodworkers to whom you send work. They need to be able to work to your standards of quality and they need to be able to meet your schedule. If they can’t do that, you have to fix it. If they’re late in completing the work, you may have to pay late penalties. You may even lose customers as a result. Still, for the most part, the risks are limited to the immediate job(s) that you sub out. Normally, you’re not under any long term obligations.
The rewards are limited since you have to relinquish part of your profits. You can’t expect another business to do work for you without making a profit. This type of relationship works best for businesses with access to a high end market where the company receiving the sub-contracted work doesn’t have that same access.
If space isn’t a problem, you might hire contract workers to handle the overload. Here again, you take chances with the quality of work. You can’t expect these workers to be as efficient as your regular employees. You do have better control than with sub-contracting, however. If their work isn’t up to your standards or if they can’t keep up with your schedule, you can terminate the relationship. You don’t need to wait until the job is complete to find out if they’re doing good work. The damages are usually not devastating and recovery shouldn’t be overwhelming.
The next step is to hire more employees on a permanent basis. This requires more of a long term commitment, especially with all the government regulations required by employers nowadays. Even so, the relationship can be terminated without devastation to the business if things don’t work out. Permanent employees are usually more cost effective than contract workers in the long run.
Depending on the nature of the work, the above solutions may not be economically viable. If efficiency is of prime concern, the best solution may be to increase throughput by investing in more efficient machinery. Unless you have a substantial amount of working capital, the risks are high. Floor space may need to be increased to accommodate large machines and rigging costs are incurred every time they need to be moved. Dust collection systems will need to be upgraded. Utility costs increase dramatically for running the machines and dust extraction. In addition, financing costs, insurance, etc. all have to be taken into consideration.
If you plan to purchase CNC machinery, you need to include the cost of software to run the machine and possibly upgrading your CAD or 3D Modeling software to increase efficiency in programming. Training is potentially required for CAD operators, programmers, and machine operators.
Before making a commitment to these long term expenses, it’s important to consider a number of factors in your business success. One of the most important is to examine your customer base. If your customers are businesses:
- How many customers do you have?
- If your business has only one or two primary customers, your business is vulnerable to problems in their business.
- They may find a new supplier to replace you for any number of reasons.
- Are your customers all in the same industry?
- If they’re in an industry that’s subject to downturns, that could be a problem for you.
- Are your customers well established or just getting started?
- Young companies are at a higher risk of faltering or failing
If your customers are individuals:
- Will they be willing to continue buying from you if the economy weakens?
- Are they buying your products based on a trend that may end at some point?
- How much repeat business can you expect from each customer?
When you’re looking to make large investments, it’s always a good idea to have your risks analyzed by a consultant. You may want to start with free or low cost consultants such as S.C.O.R.E. (Service Core of Retired Executives). An objective opinion by someone outside your business is essential. At the same time, the more they know about your industry, the better.
Seeing what modern machinery can do is fascinating. Be sure to analyze the actual cost savings carefully. Cool stuff loses its appeal when you’re struggling to make the payments.
Whenever I see a machinery auction at a former factory location, I wonder what happened that caused them to go bankrupt after having grown large enough to have bought so much expensive machinery. They apparently had a substantial amount of business savvy to accumulate that many assets. Did they become over-confident and purchase more than they should have? How big of a slump did it take to put them under? Remember, no matter how sales fluctuate, the costs of the machinery are constantly there. It doesn’t take too many slow months to get in over your head.
I know the analysis above sounds like “doom and gloom”. On the other hand, taking risks to grow a company is very often the right thing to do. Technology has the potential to increase profitability over the long run like nothing else can. Just be sure of the position of your business and its ability to weather potential downturns and even a little bad luck if it comes.