Question

how does expansion of business impacts the future Liquidity, Future Profitability, and Future financial position?

Answer 1

For most of the businesses, growth signals success, and growth creates new opportunities to expand. However, expanding business isn't without risk. Sometimes along with many many advantages, it has some disadvantages which need to be consider while taking Decision of expansion in any business.

Impact of business expansion on Future Liquidity:

Liquidity refers to ease with which an asset of Security can be converted into ready cash without affecting its market price. Possibly, expansion provide greater financial viability in business, but sometimes organization need to borrow in order to meet funds requirement for expansion cost. for example, new space or Equipments or other resources etc. So it can cause shortage of cash in future.

Impact of business expansion on Future Profitability:

The point of business expansion is to make more money. A successful expansion increases both gross sales and net income as new products and sales bring in more revenue and cover operating costs. However, the process takes time and money, and many expanding businesses experience losses before their new endeavors earn a profit. Successful business expansion involves careful and realistic planning and budgeting to be prepared for revenue shortfalls and incremental growth. Increasing net income through expansion involves maintaining a successful balance so the additional revenue you earn exceeds your added operating costs. Because it costs money to expand, businesses may experience short-term [profitability shortfalls despite revenue increases.

Impact of business expansion on Future Financial Position:

Generally, expansion means debt, business expansion should be attempted only in businesses already profitable. To attain profit potential, a balance must be maintained between asset and liability items that are on the balance sheet and operating items that are on the expense and income reports. The existing debt position of the business must be balanced with equity, or additional equity must be obtained to balance future debt.

The rule of thumb is for the equity position on a balance sheet, expressed as equity divided by assets, to range from 30 to 50 percent. If your business has an equity position of less than 30 percent and youwish to obtain financing for growth, a certain amount of money will have to be injected as equity to finance additional debt.

In this way, expansion of business impact on the liquidity, profitability and financial position differently. One should critically assess all impacts before taking Decison of expansion.