The key questions to answer before expanding into new markets

The Covid-19 crisis has caused a dramatic shift in consumer habits and business practices. This in turn has opened up once in a generation opportunities for companies to expand into new markets.

“Financial monitoring is even more important today because of the virus. A company you thought was fine yesterday can become a problem overnight (think: airlines or restaurants),” explains Nicolas Marchenoir, Head of Commercial Underwriting at Allianz Trade France.

Here are some key considerations to help you evaluate your choices. 

If you’re thinking of expanding into a new market, the first step is to work out not just where you want to go, but what it will take to get there. You may already have partners in place, or perhaps the location is strategically placed for manufacturing or distribution or access to retail locations.

But don’t stop there. You also need to gather information on local regulations, employment practices, and debt collection procedures to see if this location is really a good fit for your company. Some of this information is available in our up-to-date country reports and our tool Trade Match can also help you spot the biggest export opportunities and the greatest risks.

Next, evaluate your company’s financial status carefully to see if this expansion is really something you can afford and how it aligns with your company’s objectives. This analysis is more important than ever in today’s turbulent, opaque times, as it is often difficult to plot the best way forward. You may need to use a more dynamic real-time approach than usual as well as a wider range of financial KPIs to keep up with the pace of change and create an accurate financial performance analysis.

When looking to expand, KPIs go beyond a classic balance sheet analysis, to help you identify the best opportunities, business partners and customers. “A complete analysis of the financial performance of an SME now requires a more dynamic and transversal analysis that goes beyond a single balance sheet photo,” advises Philippe Vammale, Risk Underwriting Manager at Allianz Trade France.

The crucial indicators to monitor include:

• Operating cash flow: the amount of money going into and out of your business.
• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation): it’s is a measure of your company’s profitability.
• Debt-to-EBITDA ratio versus the industry average: the amount of income your business must generate in order to service your debt. This is a good indicator of how solvent your finances are compared to your peers.
• Working Capital Requirement, the amount of money you need to run the company. The lower the WCR, the more discretionary capital you have available to use for things like expansion once you’ve paid your bills.

To learn more about these indicators, check our article on the five key financial performance indicators you should follow to monitor your business performance.

It is tempting to quickly seize the new market opportunities the recovery offers. But first, do a careful calculus of the impact an expansion will have on the financial health of your company.

Ask yourself these basic financial questions before considering any expansion:

• Will this expansion lift my sales and profits?
• How much will the expansion cost, and can I afford it?
• What finance, staff and production capabilities do I need?
• How much debt can my balance sheet take on?
• How do I justify this to my partners and investors?

Keep in mind that it costs money to make money, so even if your cash conversion cycle remains constant, your expenses will increase along with the expansion and that puts extra pressure on your working capital. In addition, any increased debt you assume due to a new customer, partner or market opportunity should be put into the context of your company’s current and future cash flow.

An acquisition is another way to expand, and can offer you a fast-track route to increasing scale at a time when forecasters are expecting a burst of activity as economies rebound. But whether or not that makes good strategic and financial sense for your company is what matters most.

Consider the following operational issues before launching forward:

• What strategic objective will this expansion achieve?
• What are the benefits for my company – increased market share? Cost-saving synergies? What kind?
• How hard will it be to integrate the company? This can take longer than you think!

Keep in mind that taking over a company typically involves more time and effort than you imagine, and that it will in turn absorb more of your working capital.

Taking a risk requires caution and to anticipate worst case scenarios so you can be prepared when things don’t go according to plan.

Professional risk experts can help you align the answers to those questions with your desire to expand and choose the right time to make your move. With trade credit insurance from Allianz Trade, you gain access to risks insights and predictive protection to make better-informed decisions and face your trade challenges.

For more tips and advice on business monitoring, download our ebook: Boost your financial performance analysis.