As any business owner who is also a parent will tell you that your business goes through similar stages of business development to the ‘cycle of life’ for humans. Parenting strategies that work for your toddler cannot be applied to your teenager, and this also applies for your small business. Over time, your business will go through various stages of business life cycle; this blog tries to prepare you for them (as far as that is possible). These next few blogs will hopefully show you what upcoming focuses, challenges and financing sources you will need to succeed, dependant on what stage your business is in.
1. Seed Stage: The ‘seed stage’ of your business life cycle is when your business is just a thought or an idea, akin to the conception or birth of a new child. Most seed stage companies will have to overcome the challenge of market acceptance and pursue a niche opportunity. Do not spread money and time resources too thin.
At the seed stage of business, the focus will be on aligning the business opportunity with your skills, experience and passions. Other focal points include deciding on a business ownership structure, finding professional advisors, and business planning. From a financial view at this stage of business life cycle with no proven market or customers, the business will rely on cash from owners, friends and family. Other potential sources include suppliers, customers and government grants.
2. Start-Up Stage: Your business is now born and exists legally; products or services are in production and you have your first customers, well done and now breathe! If your business is in the start-up life cycle stage, it is likely you have under estimated money requirements and the time to get to market. The main challenge is not to burn through what little cash you have. You need to learn which parts of your business and customers deliver your profit.
A start-up requires establishing a customer base and market presence along with tracking and conserving cash flow. From a financial view at this stage, money can come from the owner, friends, family, suppliers, customers, or grants.
3. Growth Stage: Your business has made it through the toddler years and is now a child – in business terms your turnover and customers are increasing with many new opportunities and issues. Profits are strong, but competition is now appearing. The biggest challenge growth companies face is dealing with the constant range of issues bidding for more of the owner managers’ time and money. Effective management is required and a possible new business plan. From an individual point of view, learn how to train and delegate to conquer this stage of development.
Growth stage of business life cycle are focused on running the business in a more formal style to deal with the increased sales and customers. Better accounting and management systems will have to be set-up, and these stage new employees may have to be hired to deal with the increase of business.
From a financial view, money comes from different sources, including banks, profits, partnerships, grants and leasing options.
4. Established Stage: Your business has now matured into a thriving company with a place in the market and loyal customers. Sales growth is not explosive but manageable. Business life has become more repetitive and routine. However it would be too easy to rest on your laurels during this stage. You have worked hard and maybe earned a break but the marketplace is relentless and competitive. Stay focused on the bigger picture. Issues like the general economy, competitors or changing customer tastes can quickly end all you have work for.
Business at the established stage will need to be focused on improvement and productivity. To compete in an established market, you will require better business practices along with automation and possible outsourcing of tasks or functions to improve productivity. Finances would now come from the business’ profits, banks, investors and government.
5. Expansion Stage: This life cycle stage is characterised by a renewed period of growth into new markets and distribution channels. This stage is often the choice of the small business owner to gain a larger market share and find new revenue and profit channels. Moving into these new markets requires the planning and research of a seed or start-up stage business. Focus should be on businesses that complement your existing experience and capabilities. Moving into unrelated businesses can be disastrous.
Adding new products or services to existing markets or expanding the existing business into new markets and customer types will put pressure across the business. From a financial view, new money sources should include joint ventures, banks, licensing, new investors and partners.
6. Decline Stage: Negative changes in the economy, society, or market conditions can decrease sales and profits for all businesses. For many this may be the final chapter for the business under the existing owners, or even the end of the business itself.
Businesses in the decline stage of the life cycle will be challenged with reduced sales & profits, plus negative cash flow. The biggest issue is how long the business can support this negative cash flow – the focus should be on searching for new opportunities and business ventures. Cutting costs and finding ways to sustain cash flow are vital for the declining stage. From a financial view new money sources can include existing suppliers, customers, or owners themselves injecting new money into the business (or a change of owners).
7. Exit Stage: At this stage is the opportunity for a business owner is to ‘cash out’ and get a return for all the years of hard work. Alternatively it could be simply recognising that the business is no longer a viable entity and closing down the business. Selling a business requires a realistic valuation, meaning its real value in the current market place. If you decide to close your business, the challenge is to deal with the financial and psychological aspects of a business loss.
The focus at this stage includes getting a proper valuation on your company, and preparing your business’ management, etc. to make the company worth a premium valuation to the buyer. You should be considering setting up legal buy-sell agreements along with a business transition plan, and involve proper professional advice.
The sources of finance may include a partner, remember that one source of money includes tax planning to get the best tax strategy to sell or close-out down business.
To wrap up this set of blogs I would not to leave the impression that the 7 stage of the business life cycle occurs in chronological order. Some businesses skip a stage, whilst other successful business owners decide that they will stay in the established stage. Understanding where your business fits on life cycle will help you foresee upcoming challenges and make the best business decisions.
This description of the different stages has an academic background, and can be described in several different ways. Another common way often used is based upon the Greek philosopher Ptolemy, i.e. infant, childhood, teenager, young adult, adult, retirement and elderly. Also William Shakespeare used ‘7 ages of man’ to describe how humans go from an infant to death in his play ‘As You Like It’ – the famous ‘all the world’s a stage’ speech. I have explained it not using these models, but a model that allows a seed phase that many businesses go through, but essentially the stages are very similar.
Unsure what stage of business is in, or maybe you want to get your company into the growth stage but worried about the cash flow implications, or if you want some pointers and advice on practical steps to take – call Phil