Turning a small business into a larger one is a huge task, and one that is not always replicable from one business to the next.
But while not all small businesses are the same and do not grow in the same way, there are similarities and patterns that often translate from one business to the next, largely based on the stage the business is in.
If you’re trying to grow your small business, understanding where you are now is the first step in developing a strategy to move yours up and to the right. Here are the five stages of small business growth and the key elements you need to focus on to take yours to the next level.
Stage I: Existence
At this stage, the main issues for the business are getting customers and delivering the product or service contracted for. Key questions include:
Can we get enough customers, deliver our products and provide services well enough to become a viable business?
Can we grow from this key customer or pilot production process to a much broader sales base?
Do we have enough money to cover the considerable cash flow needs of this start-up phase?
The organization is simple: the owner does everything and directly supervises his subordinates, who must have at least average skills. Systems and formal planning are minimal or non-existent. The company’s strategy is simply to stay alive. The owner is the business, performing all the important tasks and being the primary provider of energy, direction, etc.
Stage II: Survival
By reaching this stage, the business has demonstrated that it is a viable business entity. It has enough customers and satisfies them enough with its products or services to keep them. The key issue then shifts from mere existence to the relationship between revenues and expenses. The key questions are:
In the short term, can we generate enough cash to break even and cover the repair or replacement of our fixed assets as they wear out?
Can we, at a minimum, generate enough cash flow to stay in business and fund enough growth, given our industry and market niche, to achieve an economic return on our assets and labor?
The organization is still simple. The company may have a limited number of employees supervised by a business manager or general foreman. None of them make important decisions independently, but carry out the rather well-defined orders of the owner.
Systems development is minimal. Formal planning is, at best, a cash flow forecast. The main objective is always survival, and the owner is always synonymous with the business.
At the survival stage, the business may grow in size and profitability and move to Stage III. Or, as is the case with many businesses, it may remain in the survival stage for some time, earning marginal returns on the time and capital invested, and eventually close when the owner quits or retires.
Stage III: Success
When a small business begins to generate profits, owners are faced with a decision: what do they do with those profits? Most owners will use it for one of two things: to fund other things (personal or business) or to reinvest in the business to grow it further.
What systems do we need to put in place to keep the business profitable?
How do we recruit the right people to help us achieve our goals?
How do we finance future growth, if that is our goal?
Businesses that fail in Stage 3 do so because the profitability they have developed erodes, often returning to Stage 2. For owners who choose to use profits to fund other things, this often means a change in external markets. But for owners in stage three who choose a growth path, failure often occurs because they neglect to develop the systems and personnel needed to support the business while they attempt to do so.
Companies that choose not to grow further must focus on sustainability and systems, while companies that want to grow further must focus on finding resources (financial and human) that can help them do so, in addition to maintaining sustainability. Companies that succeed in this move on to stage four.
Stage IV: Take-off
In this phase, the key issues are how to grow quickly and how to finance that growth. Therefore, the most important questions arise in the following areas:
Can the owner delegate responsibilities to others to improve the efficiency of managing a rapidly growing and increasingly complex business? Also, will this be true delegation, with performance checks and a willingness to see mistakes made, or an abdication.
Will there be enough to meet the demands of growth (which often requires the owner to be willing to tolerate a high debt ratio) and to ensure that cash flow is not eroded by inadequate expense control or unwise investments due to owner impatience?
The organization is decentralized and, at least in part, divided – usually in sales or production. Key executives must be highly skilled to manage a complex and growing business environment. Systems, challenged by growth, are increasingly sophisticated and extensive. Operational and strategic planning is done and involves specific managers. The owner and the business have become reasonably distinct, but the business is still dominated by the owner’s presence and control of inventory.
This is a pivotal time in the life of a business. If the owner meets the challenges of a growing business, both financially and managerially, it can become a large business. If not, it can usually be sold – at a profit – provided the owner recognizes his or her limitations early enough. Too often, those who have brought the business to the stage of success fail in Stage IV, either because they try to grow too fast and lack cash flow (the owner is a victim of the omnipotence syndrome), or because they are unable to delegate effectively enough to run the business.
Stage V: Resource Maturity
Rapid expansion does not last forever, and companies entering Stage V face the reality of slowing growth. Companies that reach this stage have well-developed systems and sufficient resources (both financial and human) to begin focusing on stabilizing in orbit rather than worrying about reaching it.
How do we stabilize and streamline our operations for the future?
How do we keep our team engaged, even though we have slowed down?
How do we stabilize our business without losing sight of the importance of innovation?
How and where do we find new markets to capture?
Companies that reach stage five often fail because they lose momentum.
Key management factors
Several factors, which change in importance as the company grows, are critical to ultimate success or failure.
We have identified eight of these factors, four of which relate to the business and four to the owner. The four that concern the business are:
1. Financial resources, including cash flow and borrowing capacity.
2. Personnel resources, namely the number, depth, and quality of people, especially at the management and staff levels.
3. Systems resources, in terms of the sophistication of information, planning, and control systems.
4. Enterprise resources, including customer relationships, market share, supplier relationships, manufacturing and distribution processes, technology, and reputation, all of which give the company a position in its industry and market.
The four factors relevant to the owner are:
1. The owner’s goals for himself and the company.
2. The owner’s operational capabilities to perform important tasks such as marketing, invention, production and distribution management.
3. The owner’s managerial ability and willingness to delegate responsibility and manage the activities of others.
4. The owner’s strategic abilities to look beyond the present and match the company’s strengths and weaknesses to its goals.
A company’s stage of development determines the management factors to be considered. Its plans help determine what factors will eventually need to be addressed. Knowing one’s stage of development and future plans allows managers, consultants and investors to make more informed choices and prepare themselves and their companies for future challenges. While each company is unique in many ways, all face similar issues and all are subject to great change. Perhaps that’s why being an owner is so much fun and so challenging.