How to expand your business despite economic headwinds

At a glance

An understanding of navigating rising operational costs, regulatory changes, and low economic confidence when considering expansion is critical to making informed decisions.
Balancing expansion with marginal growth is essential. Owners should invest strategically, backed by thorough financial modelling and the development of a robust business plan to ensure long-term viability.
Maintaining a clear and consistent connection between customer needs and business offerings is crucial for effective brand identity, customer loyalty, and market adaptability, all of which support informed growth decisions.

Steve Bird, Business Growth Advisor at Elephants Child, lays out what he thinks business owners need to consider when planning expansion in 2025.

Challenges in the current economic climate

The economic environment can have a significant impact on a company’s ability to expand. Businesses today face higher operating costs, from energy, materials inflation and now wages. Additionally, changes in sickness benefit regulations may mean increased financial responsibility for employers, which can affect cash flow and long-term planning.

In the UK, economic confidence remains low due to persistent inflation, higher interest rates, and market volatility. Uncertainty surrounding government policies and tax changes adds to the risk for businesses considering expansion. A recent survey by the British Chambers of Commerce revealed that business morale reached its lowest point in October 2024, since September 2022, following significant tax hikes announced in the Labour government’s budget.

The Government seem to be focusing on public sector infrastructure and global businesses to grow the economy, at the expense of SME’s who employ three out of every five people. Supply chain disruptions and rising import costs blowing in from the USA, further contribute to financial strain, making it more difficult for SME businesses to plan long-term investments.

Additionally, the cost-of-living crisis has reduced consumer spending power, affecting demand in multiple sectors. Many businesses are experiencing reduced or stagnant revenue streams, making them hesitant to take on expansion-related debt or additional operational costs. The difficulty in securing affordable financing, coupled with skilled labour shortages, makes hiring and retaining staff a challenge.

Before committing to expansion, it is crucial to assess how these external factors might impact your business operations and profitability.

Weighing up expansion versus marginal growth

Expanding a business isn’t just about growing for the sake of it—it’s about ensuring sustainable and profitable growth. Business owners must evaluate whether expansion will lead to increased revenue that outweighs the additional costs, in other words, its profitable expansion.

A key consideration is the concept of marginal growth, where a business expands slowly within its current means rather than making a large-scale investment. This approach allows businesses to manage risks while capitalising on new opportunities. Weighing the pros and cons of expansion versus marginal growth requires careful financial modelling and risk assessment. During this phase, businesses can put in place management training and strategic plans to be ready for expansion.

The importance of a golden thread and a business plan

All of these macroeconomic challenges can be mitigated by being obsessive about your customer and why they buy from you. It’s what I call the “golden thread”. A ‘golden thread’ refers to a consistent and clear connection between a business, its customers, and its market. This guiding principle ensures that all business decisions, from product development to customer service, align with a clear value proposition and market demand, the golden thread. Here are some key pointers:

Stronger Brand Identity – A well-defined golden thread helps businesses create a strong and recognisable brand, ensuring consistency across all customer interactions and marketing efforts.
Customer Loyalty and Retention – When customers see a clear, reliable connection between a company’s values and its offerings, trust is built, leading to repeat business and long-term customer relationships.
Market Responsiveness – Businesses with a golden thread can better anticipate and adapt to changing customer needs, allowing for more agile decision-making and innovation.
Efficient Communication – Having a clear, aligned message ensures that all marketing, sales, and customer service teams work towards the same goals, improving customer engagement.
Informed Business Growth – Expansion becomes more strategic when a business maintains a clear understanding of its customers and market positioning, reducing the risk of misaligned and therefore wasted investments.

Your plan should include:

Market Analysis – Understanding customer demand, competitors, and industry trends
Financial Forecasting – Projecting costs, revenue, and profitability to ensure sustainability.
Operational Strategy – Identifying the resources, staff, and infrastructure needed to support growth, as costs often rise in steps rather than linear.
Risk Management – Preparing contingency plans for potential setbacks, for example, half your revenue expectations in years one and two and double your costs and see what happens.

Having a clear and detailed business plan helps business owners make informed decisions, secure funding if necessary, and set realistic expectations for growth.

Preparation

At Elephants Child we focus on the importance of preparation. Driving valuable growth through this golden thread is key and it is useful to understand where you want this growth journey to lead. If it’s exit then you need to be ready strategically, commercially, legally and financially of course; but also, the emotional challenges of the process with perspective and support as deal fatigue is very real. We think as many as 70% of SME businesses fail to sell first time due to lack of preparation and knowledge of the process. The clamber to sell can be heightened in a volatile market where costs pressures and increase taxes add to market uncertainty sometimes lurching business owners to want to sell quickly. Being prepared takes time and the passage of time helps in ensuring the business, owners, leadership and exit teams are all market ready. From the point a business is ready it can take typically twelve months to receive the first payment, and this is often around 60%. Valuable growth gives the owners options, control and if exit is the plan, the opportunity to maximise value and at the very least make sure your transaction is deliverable.