After six years in business, Ben’s Barber Shop has developed a steady customer base and is profitable. Appointments are often fully booked, especially on evenings and weekends, and the owner, Ben Rivers, regularly turns away customers during busy periods. Mr. Rivers has saved $90,000 in business profits that can be used for one major investment. His goal is to increase the shop’s long-term profits and serve more customers without taking on more financial risk than the business can manage.
Mr. Rivers considers three alternatives:
Open a second location. A storefront is available in a growing neighborhood several miles away. Opening the shop would require about $85,000 for the lease, renovations, equipment, licenses, advertising, and initial operating expenses. The neighborhood has been adding new housing and businesses, giving the shop access to a new pool of potential customers. However, Mr. Rivers would need to hire four additional barbers, attract enough customers to cover the new location’s ongoing expenses, and divide his management time between two shops.
Expand the current location. The space next door is available for lease. For about $60,000, Mr. Rivers could renovate the space and add several barber stations. The expansion would allow the shop to serve more customers while building on its existing reputation and customer base. Growth would likely be more limited than with a second location, but Mr. Rivers could continue managing one shop and retain about $30,000 in savings.
Keep the money in reserve. Mr. Rivers could make no major investment and keep the $90,000 available for unexpected expenses or a future opportunity. This would expose the business to the least immediate financial risk and give Mr. Rivers greater flexibility. However, the shop would remain at its current capacity and continue turning away some customers.
Mr. Rivers decides to open the second location. He expects reaching a new customer base to provide the greatest opportunity for long-term growth. In making his decision, he considers the neighborhood’s growth, potential new revenue, startup costs, and the expense of hiring additional staff. He believes the potential for expanding the business outweighs the higher costs and risks of operating a second shop.