20% of businesses fail within the first year, and only about 50%survive for over five years.
The business environment is naturally risky. And every good entrepreneur will want to know what they can do to beat the odds. No one wants to pump resources into a venture that won’t work out. While every business faces different challenges depending on capacity, organizational structure, management styles, and business strategy, small businesses may experience common problems arising at similar stages in their development.
Benefits of Understanding the Growth Stages of a Business
Systematically categorizing these growth patterns and problems can help entrepreneurs in putting in place structures that guarantee growth and success. Some of the benefits of understanding the growth stages of business include:
- Help in assessing the challenges the business is currently facing and determine how to effectively overcome them. For example, there might be a need to discard the existing computer systems and upgrade to new ones.
- Entrepreneurs can also anticipate resources needed at various points during growth. This helps in resource planning and management as the business grows.
- Third, it helps businesses to evaluate the impact of government policies on the business. The company can identify opportunities such as tax reliefs that improve cash flow and profitability.
- Lastly, it helps consultants and accountants to diagnose problems and come up with solutions suited to the business and prevailing situation. For example, a year old business wouldn’t effectively solve it challenges in the same manner as a 100-year old business. Similarly, the human resource management needs of a 10-employee business are different from that of a 1000-person company.
The Growth Stages of a Small Business
Regardless of the industry, organizational structure, and management style, small businesses go through similar growth stages in their lifetime. The five stages of growth for small businesses are:
Stage 1: Existence
This is the initial stage. The main focus of the business is how to get paying customers and deliver the products it offers. The goal is to be a viable business. Some of the key questions entrepreneurs ask at this stage include:
- Can we acquire enough customers and deliver our products and services well enough?
- Is it possible to expand to a much broader customer base from the pilot production process or single key customer?
- Do we have enough cash flow to cover our cash demands?
Businesses in the existence stage have a very simple organization. The owners do everything and directly supervise any subordinates. There are little to no formal planning or systems, their sole purpose is to stay afloat. In most cases, the owner supplies the capital for running the business with the help of friends and family.
In the event that the business doesn’t get sufficient market penetration to become viable, it closes down when the capital runs out. Owners who are lucky get to sell the business for its asset value. Businesses that survive this stage move to the second stage.
Stage 2: Survival
At this stage, the business has enough customers and it is able to satisfy them with its products and services. The focus therefore shifts from existence to finding the perfect balance between its revenues and expenses.
The business’es key concerns are:
- Are we able to generate enough cash in the short run to break even and do maintenance on the capital assets?
- Can we generate enough cash flow to stay in business and grow to a size that brings a return on investment (ROI)?
Just like the previous stage, the organization here is simple. There may be a general manager to supervise employees, but all the major decisions are still made by the owner. There’s minimal system deployment and planning is limited to cash forecasting.
Some businesses attain profitability, grow in size, and move on to the next stage. But others get stuck in the survival stage, making marginal profits before the owner gives up and shuts shop. In case the business is sold, it’s usually at a loss.
Stage 3: Success
The dilemma for the business owner now is whether to stay stable and profitable or leverage the company’s accomplishments and expand. The owner can partially or completely disengage from the business and use it as a support as they pursue other interests, such as starting a new business or politics.
There are two substages in this stage. They include:
- Disengagement: The business is sizeable, has a good market penetration, and is economically healthy. Its profits are average or high. Unless mismanagement reduces its competitive edge or a change in the business environment destroys its niche, the company can stay in this stage indefinitely. The owner hands over certain key duties to competent functional managers. While cash is plentiful, the business still works hard to avoid a cash crunch during the hard times. Additionally, the business put in place production, financial, and marketing systems to drive activities.
Some owners sell the business or merge with other companies for a profit at this point. If the business cannot adapt to a change in business environment, it may find itself back in the Survival stage.
- Growth: In this substage, the owner’s focus is on marshalling resources for growth. They take big risks for financing growth of the business. They pay attention to strategic and operational planning, and systems are installed to forecast the company’s forthcoming needs.
If it’s growth strategy is successful, the business moves to the next stage (take-off). But if the risks don’t pay off, the company may go back to the Survival stage before ending up in a distress sale or retrenchment. Sometimes, the causes of failure are detected earlier and the business shifts back to the Disengagement substage.
Stage 4: Take-Off
Business owners at this stage are chasing rapid growth. Their main concern is how to finance the growth even though they’re reasonably separate from the business. The focus shifts to the following two key areas:
- Delegation: The owner ponders whether delegating responsibilities will help to improve managerial effectiveness. They can choose to fully delegate managerial roles and cede controls on performance or just abdicate certain responsibilities.
- Cash: Does the company have enough cash flow to meet the great demands that come with growth? Is the owner willing to tolerate a high debt-equity ratio? Is the owner patient enough to avoid ill-advised investments or inadequate expense controls?
In this stage, the business has a decentralized organization with competent managers overseeing various divisions. The key divisions are production and sales. The systems in place are more extensive and refined to handle strained growth.
The company can become a big business if it pulls off its growth strategy. Otherwise, it’s sold off for a profit as long as the owner acts soon enough. But in many cases, owners fail in this stage due to the omnipotence syndrome (growing too fast and running out of cash) or the omniscience syndrome (wanting to be in control and failing to delegate effectively). Investors and creditors often force the owner to hand over management to avoid failure.
If the company fails, it may retrench employees and continue operating sucessfully as a substantial company or drop back to stage three. But if its problems are too big, it may even drop back to Survival stage.
Stage 5: Resource Maturity
This is the final stage of business growth. The company’s biggest concern at this point is to consolidate control of all the financial gains made in the previous stage. It also aims to retain the advantages of small size such as the entrepreneurial spirit and flexibility of response to changing business environment.
The business has to expand its management fast enough so it doesn’t get crippled by inefficiencies resulting from fast growth. Strategic and operational planning are more detailed compared to the previous stages. The management is completely decentralized and systems are extensive and well developed. The company enjoys the advantages that come with size, financial resources, and managerial talent to be a formidable market force.
But some businesses slip into ossification because they are unable to preserve their entrepreneurial spirit. They are characterized by a lack of innovative decision-making as they focus on avoiding big risks. Such businesses are usually overtaken by rapidly growing competitors who are able to adapt to major environmental changes fast.
Factors That Impact Business Growth
There are several factors that influence a business’s ability to grow and develop. They determine the ultimate success or failure of a business. The factors include:
- The business owner’s personal and business ambitions
- The owner’s operational abilities in key areas such as invention, production, distribution, and marketing
- The owner’s managerial capabilities and willingness to delegate responsibilities
- The owner’s strategic and forecasting capabilities to look beyond the present
- Financial resources, including cash flow and borrowing power
- Human resource management
- Systems resources such as planning, control, and information systems
- Business resources such as market share, customer relations, supplier relations, technology deployment, company reputation management, and production and distribution processes
As a business grows from one stage to the next, the importance of these factors change. For example, systems and controls may be irrelevant to a business in the Existence stage but very crucial to one in the Take-Off stage. Cash is also an extremely important resource at the start but becomes easily manageable in the latter stages.
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