Header_Blue_Flame_2.png

3 Things to Consider Before Upgrading Your Office Space

BY Eddy Hood In Profitability On Mar 09, 2016 With 1 Comment

So you want a new office do you? But you're stuck because you'll need to pay more in rent and you don't know if it's  good idea or not.  I've seen many office upgrades send businesses into bankruptcy because the entrepreneur didn't consider these three things. 

 
 
 
 
 
 
 
 

3 Things to Consider Before Upgrading Your Office

Getting a new office space is exciting.  It symbolizes the success of your company, creates new beginnings, and generates a lot of momentum for change.  But it's not always a good idea.  Here are the things you'll need to consider before you sign that new lease agreement. 
 

#1 - What's the True Cost of Rent?

Let's run a little scenario.  Assume your current rent is $2,000 and you want to move into a space that is $3,000 a month.  That would mean that you'll need to sell $1,000 in additional products or services to cover the new space right? Wrong.  

This is where so many entrepreneurs get trapped.  Here's how you figure out the true cost.  You'll need to know your gross margin.  If you don't know how to calculate it, here's a video I did a long time ago to help you crunch the numbers. 
 
 
 
 
 
 
 
 
Now that you know your gross margin, let's assume it's 23%.  This would mean that for every dollar you generate in sales, after you pay for the labor and materials on that dollar, you only get to keep .23 cents to help pay for overhead.  Since you only get to keep .23 cents, you would need to sell $4,347 in new products or services to cover the $1,000 in rent.  This is calculated by taking the increase in rent of $1,000 and dividing it by your assumed gross margin of .23. Make sense?  
 
Now you see why so many office moves kill businesses.  The entrepreneur thinks they need to sell $1,000 extra a month to cover the rent, when in reality they need to sell $4,347. That's a huge difference.  
 
Now that you know the true cost of your new home, be honest with yourself.  Can your sales team generate that much additional revenue and can your production team support it?  Let's take it one step further.  Assume you sell your product for an average price tag of $75.  That would mean that you would need to sell 58 additional products.  ($4,347 / $75 = 58 products)
 
If it's no sweat off your back, then you past the first step.  However, if selling that much additional each month has you freaked out, don't make the move.  You're not ready for it.
 

#2 - Functionality

If you can afford the additional rent, the next step is to look at how the office space improves the logistics of your company.  Do you get a better floor plan or a bigger warehouse to store inventory? What about location to employees or access to resources?  If the company makes you better from a functional standpoint, move on to the last test. If you're just moving because it's closer to your house or your get a really cool office, you might want to reconsider.
 

#3 - Company Morale

I am a big proponent of a beautiful office.  I believe that workplace aesthetics are extremely important.  A nice office in a nice part of town makes for an attractive place to work.  When people like where they work, their efficiency goes up.  However, if your new office is in a dangerous part of town and mold is growing in the walls, you might want to hold off on the space and keep shopping.  
 
These are our three rules for taking the plunge into a new office space.  If you can afford the true cost of the additional rent, it makes you better logistically, and it improves company morale, then it's probably a good move.  If you can't answer yes to the above three tests, sit tight and look for a better opportunity.
 

Additional Reading

 
New Call-to-action

My name is Eddy Hood. I've coached over 500 businesses on how to become more profitable. I'm the Founder & CEO of Ignite Spot, and I have mad parallel parking skills.

Leave a Comment About This Blog Post