Although various experts parse out the stages of a business lifecycle in different ways, one fact remains true and consistent through all of the models: after a company's startup phase, but before the business reaches full maturity, a phase of growth and expansion occurs. Although all stages of a business's lifecycle present their own unique challenges and opportunities, the “growth” phases are the most crucial to a company's true success.
Briefly, the Five Stages of the Business Lifecycle:
1. Idea Development
In the first stage, you have a concept, you do not yet have a business. You may have not yet even developed your product. What you have is an idea for a great product or service and an inkling of how you could form a business around it.
During the development stage, you spend lots of time pitching your idea and asking for opinions from friends, colleagues and industry contacts to get a feel for your potential market and to gauge the viability of turning your inspiration into reality.
The startup stage begins immediately following your company's launch. Decisions you make during this stage will be integral to the future (or failure) of your business.
The startup phase is marked by product testing, frequent changes (called pivots), exhaustive efforts to increase your customer base and making the most of every bit of customer feedback you receive to improve your product or service and to stoke your business's fires. In a startup, working capital primarily comes from your own seed money or investors. You should spend as little money as possible in this phase unless it relates to getting new clients or serving the ones you have.
3. Growth and Establishment
During the growth, or establishment, phase your company should have a fairly stable customer base. You should be consistently generating income and attracting more new customers.
Consistent revenue generation stabilizes cash flow, which you can use to cover recurring expenses. In addition, you should also find your time divided between managing your business, the employees whom you now have working for you, addressing customers' needs and contending with any marketplace competitors.
4. Growth and Expansion
Also part of the growth phase of a business, expansion occurs shortly after a company first finds stability in the growth phase. The business must then venture into new markets by expanding products or service offerings, moving beyond the region or opening new locations. This rapidly increases the rate at which a company grows. This stage and its rapid expansion present several new challenges to business owners who might suddenly find themselves facing fresh cash flow challenges with their resources and time stretched thinner than ever before.
Many successful businesses fail because they expand too quickly. You need a management reporting system to measure the return on investment on everything you do to make sure the multitude of decisions you have to make help increase profits.
At maturity, the final stage in the business lifecycle, a business should be earning consistent revenue through stable streams year after year. During this stage, business owners are often less directly involved with the day to day operations of a business, with these responsibilities charged to an entire hierarchy of management and employees.
Owners of mature businesses have several options for moving forward. They can attempt to maintain the company as it is; they can consider whether or not further expansion is possible, smart and financially feasible; or they can consider exiting the company, either by handing the reins over to another individual or selling it completely.
How to Recognize When Your Company Enters the Growth Phase
When you enter a growth phase, your company should have fairly stable income streams and a considerable customer base. Your relationships with existing clients or customers will likely be at least three to four years old, and your clients should have no trouble explaining your business model and offerings to others who might be interested in what your company has to offer. In addition, you should experience a decrease in both client and employee turnover, while facing no worries about covering payroll expenses. During this phase, your business will establish its place in the industry.
The Number One Challenge Faced During Growth and Expansion
The number one challenge faced during growth and the reason why businesses fail: is because of cash flow.
Although growing companies feel like business is going well, this is no time for relaxing. The growth stage presents considerable challenges, namely cash flow, and working capital problems can put even the most successful companies out of business.
When facing unexpected cash flow shortages, business owners often make poor, reactionary decisions, which might provide immediate solutions to problems, but do not present sustainable long-term solutions. Ultimately, these bad decisions often lead to business failure.
Profits don’t equal cash flow. The situation where profit and cash flow are at odds is very common for a small business which must invest in assets in order to grow. Making smart (data-driven) decisions will keep your business on the right track.
No matter what your business is, having best practices and foresight in your pricing, hiring/firing, and spending will help improve cash flow and help your business succeed. Many of these factors can be achieved with the right actionable financial intelligence to see the state of your business, and where it needs improvements. You get actionable financial intelligence by from your management reporting.
Navigating the Small Business Growth Stage
During the phase of growth and expansion, its necessary for business owners to adjust their focus from product development and pivoting to developing and enabling a solid team of trusted, capable employees and managers.
A growing business does not come cheap. As a result, you will have to steadily increase your company's working capital, improve operations and streamline processes in order to improve cash flow to sustain growth and expansion.
There are several ways to improve your growing business's cash flow, including:
- Invest Profits Back into the Company - When a company is in its growth phase, the smartest way to use profits is often putting them right back into the company – rather than distributing investor dividends, taking money out of the company or paying down long-term debt. You can invest profits back into your company to cover cash flow shortages, improve service delivery, spend on smart sales and marketing strategies or to further develop the expansion of your product or service offerings.
- Seek Outside Funding - Although this should typically be a last resort, it is not uncommon for growing businesses to seek outside funding during a growth phase. This is sometimes referred to as a series B round of funding. Growing companies in need of additional working capital have two options for seeking outside funding: by selling equity to investors or by taking on debt. If you sell equity to outside investors, be sure you get enough so you don’t need to go back for a second round. That’s where you get more significant dilution of your ownership stake. (I know this from experience)
- Pull the Levers of Your Key Performance Indicators - With consistent financial statements, accurate data and robust management reporting and accounting, you can use your company's finances to reveal specific ways you can make adjustments to enable growth, improve cash flow, reduce overhead and increase margins. Make sure your management reports show how much profit you generate from the decisions you made in the past, including your most profitable marketing campaigns, your most profitable clients, sales reps that generate the most profits, etc. – If you study what caused profits in the past you increase the likelihood of increased profits in the future.
As your company grows, you will not only need to ramp up employees, but your growing company will also require you to build up your back office.
Strong accounting and bookkeeping systems and processes, along with a controller and CFO or advisor, can help you navigate, anticipate and prepare for all of the financial challenges your business growth presents.
With an optimized financial management system and strategy in place, you can improve your cash flow (without taking on more debt or selling equity), reduce risks and increase profits and sustain your company as it continues to grow.