Entrepreneur's Guide: Mastering the Five Stages of Small Business Growth

Understanding how small businesses grow might seem complex due to their diversity in nature, size, structure, and management style. However, it's a crucial task that smart businesses don't overlook. Recognizing their growth stage helps assess challenges, plan for future needs, and adapt to economic changes. This knowledge also assists accountants and consultants in tailoring solutions for businesses at different stages.

While there isn't a universal growth model, recent research suggests a framework, that is designed for small and growing businesses and combines experience, research, and empirical findings. It outlines the five stages of development, as explained below.

In this newsletter, we will explore the five stages of small business growth.?

Stage I: Existence - The Start-Up Challenge

In this early stage, businesses wrestle with fundamental challenges, mainly focused on acquiring customers and delivering products or services. Key questions include:

• Can we attract enough customers and deliver our products or services effectively?
• Is it possible to transition to a broader customer base?
• Do we have enough funds to cover startup expenses?

The organization is simple, with the owner doing most tasks and minimal planning. Survival is the goal, and the owner is the primary source of energy, direction, and capital. Businesses in this stage range from new restaurants and stores to tech companies trying to establish their products. Many don't make it, closing when funds run out or owners can't meet the demands. Those who persevere enter Stage II.

Example: Newly started restaurants, small retail shops, and high-tech startups that are struggling for acceptance.

Stage II: Survival - Finding Your Footing

At this stage, businesses have proven they're more than just a dream; they're a real business. They've attracted enough customers who like what they offer. Now, the main challenge is to balance the money coming in with the money going out.

Here are the big questions:

• Can we make enough money to cover our costs and replace things when they wear out?
• Can we make sure there's enough money coming in to keep the business going and, if possible, grow to a size where we earn a good return on our work and investments?

The company is still pretty simple. It might have a small team led by a sales manager or supervisor, but the boss is still calling the shots.

Planning and fancy systems aren't a big deal yet; it's mostly about figuring out how to make ends meet. The main goal is to keep the business alive, and the owner is still the heart and soul of the operation.

In this Survival Stage, some businesses will grow and move on to the next stage. Others, like small local stores or companies that struggle to sell their stuff, might stay in this stage for a while, making just enough to get by. Some might even close when the owner retires or decides it's time to give up.

Examples: Small businesses that have overcome initial challenges but are working on staying afloat and covering expenses.

Stage III: Success - Choosing the Path Forward

At this point, owners must decide whether to take their successful company to new heights or keep it steady and profitable. The big question here is whether to use the company as a launchpad for growth (a substage III-G company) or as financial support while the owners step back from the daily grind (a substage III-D company).

Substage III-D: Success with Disengagement

At this stage, the company is financially stable with a good market position and healthy profits. It can continue like this indefinitely if market changes or mismanagement don't disrupt things.

As the organization grows, it often requires specialized managers to handle tasks the owner once managed. These managers should be competent but may not need to be top-tier since their growth potential is limited by the company's goals.

Cash flow is strong, and the main concern is avoiding overspending during good times, which could impact the company's resilience during tougher periods. The company might hire its first professional staff like a financial controller or production scheduler. Basic financial, marketing, and production systems are in place, guided by operational budgets.

As the business matures, the owner becomes less involved, focusing on other activities, while other managers take on larger roles. Many companies remain in this Success-Disengagement stage for extended periods. Some businesses can't grow due to their market niche, common in small service businesses in slow-growth areas or limited franchise territories.

Others actively choose this path. If the company can adapt to changes, it can maintain the status quo, get sold at a profit, or resume growth. For franchise holders, this means expanding by acquiring more franchises. However, if the company can't adapt, it may face closure or return to survival mode.

Substage III-G: Success with Growth

In this substage, the owner pushes to grow the company. They invest their cash and borrowing power to finance that growth.

To succeed, the business needs to make sure its core operations remain profitable while expanding. This means hiring managers who are focused on the company's future rather than its current state.

Systems are improved with an eye on future needs, and both operational and strategic planning are in place. The owner is much more involved in all aspects of the business during this growth phase.

If this approach works, the company moves into Stage IV. Often, III-G is the first attempt at growth before committing to a full growth strategy. If the company is unsuccessful in this stage, it may detect the problems in time to switch to III-D. If not, they might have to retrench to the Survival Stage before bankruptcy or a distress sale.

- Example: Small businesses that are thriving and have options to either expand or provide a comfortable base for the owner.

Stage IV: Take-Off - Navigating Rapid Growth

In this stage, the company faces the challenge of rapid growth and finding the means to finance it. The key questions revolve around two critical areas:

1. Delegation: Can the owner effectively delegate responsibilities to improve the management of the fast-growing and complex business? True delegation with performance controls is vital.
2. Cash: Will the company have enough cash to meet the demands of growth, even if it means a high debt-equity ratio? Managing expenses and avoiding hasty investments is crucial.

The organization becomes more decentralized, possibly with divisional structures. Competent managers are essential, and systems are refined to accommodate growth. Planning becomes sophisticated and involves specific managers. While the owner and business separate, the owner's influence remains.

Success in Stage IV can lead to becoming a major corporation. Failure is common if growth is too rapid or if delegation is ineffective. The original management might be replaced by investors or creditors.

If substantial growth isn't achieved, the company may maintain stability, revert to Stage III, or, if problems are severe, drop back to the Survival Stage or fail. Economic conditions and high interest rates can influence these outcomes.

Example: Companies experiencing significant growth, entering new markets, and needing substantial resources for expansion.

Stage V: Resource Maturity

At this stage, companies focus on managing their financial growth and retaining their small business advantages like flexibility and innovation. They expand their management team, streamline operations, and embrace tools like budgets and strategic planning. They operate with decentralized management, experienced staff, and well-developed systems. Success in this stage positions the company as a formidable market force. However, stagnation, known as "ossification," may occur if they lose their innovative spirit and fail to adapt to environmental changes.

Example: Large corporations in a mature and stable phase but risk stagnation without innovation and adaptability.

Applying the Model

The Small-Business Growth framework can be applied to various situations, including franchises and high-tech startups. It helps entrepreneurs and advisors make informed decisions and prepare for the challenges that come with different stages of development. The model emphasizes the need for flexibility in managing businesses and aligning owner skills and resources with the evolving demands of the company.

In summary, understanding the stages of small-business growth and the evolving management factors is critical for entrepreneurs and business owners. It provides insights into the challenges they may face and helps them make informed decisions to navigate their business successfully through different growth phases.