Offering the right strategic advice on business expansion

As companies grow, they will look to expand into new regions and possibly even new countries. This is when management accountants, acting as trusted advisers, have to bring our expertise to the table to make sure the process is a success.

The first consideration is selecting the type of expansion that is the most appropriate for the organisation. Business leaders will usually have to choose between acquiring a company already operating in the target market or setting up a new operation there. There are benefits to each option, for example:

• Buying another business means you will have a workforce that is already familiar with the regulatory environment and the work culture of the region. This could help if you need to expand quickly. 
• By setting up a new operation you can continue to use your existing systems, avoiding the need to integrate them with those of another entity. This might help make the expansion run more smoothly.

Management accountants have the expertise to consider all these issues, and make a sensible recommendation by using scenario planning techniques to provide strategic insights and analysis.

Scenario planning informs strategic decision-making

You apply scenario planning techniques to envision various possible outcomes and to determine how to address potential challenges that may be encountered during an expansion.

An example would be running hypothetical financial reports based on what would happen if the region you are expanding into experiences a change in circumstances, for example the election of a government with different tax priorities. 

You can use our CGMA Horizon Scanner tool to help you explore possible future scenarios and what steps you will need to take to safeguard your organisation’s future. If you feel you need to sharpen your strategic analysis skills, AICPA & CIMA’s offer CPD resources to keep you at the leading edge of business practice.

Financing an expansion

Whichever route a business takes to expand its operations, finance will be needed. You need to be very careful about choosing the appropriate way of financing the expansion for your organisation.

There are three choices: 

• Use existing funds and assets that have not been allocated for other business functions or projects. This method doesn’t incur liabilities, but it will reduce the company’s financial safety net.  

• Taking on debt, which will require collateral and interest payments. While it may seem as though a potential target acquisition is loss-making in terms of annual profits, it may be asset rich. If so, those assets could be enough security to cover a loan. Otherwise, a parent-company guarantee may be needed.

• Examine the equity option. Raising funds from new or existing investors is possible if they have confidence in the expansion plan. They will need persuading that the expansion is part of a programme of activities to turn results round or grow the business. If you want to learn more about equity finance, AICPA & CIMA offer an online CPD course which covers business valuation and rights issues, among other things.

The right option for the business will depend on the circumstances at the moment the decision to expand is being considered rather than a single, set rule that applies all the time. Your management accounting insights, forecasts, and advice will be the key to helping your business partners make wise strategic decisions.