The Effects of Expansion on Sales & Net Income

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 venues 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.

Business expansion is geared toward increasing gross sales by adding infrastructure or products that give customers additional reasons and opportunities to buy. A restaurant that expands by adding space for more seating increases its capacity to serve customers; a clothing manufacturer that expands by introducing a new line offers more products that its customers may want. In order to successfully increase revenue through expansion, you must be careful not to introduce products and venues that customers may choose instead of your existing options.

Increasing net income through expansion involves maintaining a successful balance so the additional revenue you earn exceeds your added operating costs. For example, if you own a restaurant and you take over the storefront next door, the additional revenue from the added seating must at least cover the added rent and utilities expenses from the new space. As with any business endeavor, this additional net income is unlikely to be absolutely consistent, and there will be days when you spend more than you earn, but you must earn more than you spend over the long term.

Because it costs money to expand, businesses may experience short-term net income shortfalls despite revenue increases. A restaurant that expands its seating must spend money to take over the new space and decorate it in a way that is consistent with its overall theme. A clothing manufacturer expanding its line spends money on prototypes, marketing and manufacturing. Assess these expansion costs before introducing a new business endeavor, and calculate how much additional revenue and income you must generate in order to cover your initial expenses.

Some business activities grow increasingly cost effective as business volume increases. A manufacturer that must dedicate an hour to warm up a machine and an hour to clean it at the end of each day spends less to produce each item if he runs the machine for four hours than if he runs it for two. As a result of these economies of scale, expansion in sales can lead to a proportionally larger increase in net income.