The Five Stages Of Growing A Small Business

Small businesses, characterised by independence of action, differing organisational structures and management styles, vary in size and capacity for growth. They, however, experience similar problems arising from their stages of development. Their similarities can be organised into a framework that highlights the common challenges that they face and the opportunities available to them, irrespective of the sectors they belong or industries in which they operate. The resulting understanding can help owners and managers in diagnosing problems and anticipating the key requirements at various points in the life of the business.

How do you develop a framework that is relevant for the growth of your small business, as dictated by the stage of its growth?

There are five stages in the development of a small business, with each stage being marked by managerial style, organisational structure, formal systems, strategic goals and the owner’s involvement in the business.

The various stages are:

Stage 1: Existence

Finding customers and delivering its product or service are the main problems that face a new business. The business wants to be viable and worries about getting enough customers to build a broader sales base and having enough money to cover the cash demands of its startup phase. With a simple organisation, the owner does everything and supervises subordinates. Formal planning and systems hardly exist. Staying alive is the main strategy of the business. When the owners cannot meet the demands of the business on their time, finances and energy, they quit. When the owners survive these challenges and remain in business, they become Stage II enterprises.

Stage 2: Survival

A business at this stage has proven to be a workable entity. Its products or services are satisfying enough customers and its attention shifts from merely existing to managing the interplay between its revenues and expenses. Its main worries become generating enough cash flow to stay in business and finance growth to a size that guarantees an economic return on its assets and the labour of its owners.

While the organisation remains simple, the business now has a limited number of employees who carry out the clearly defined orders of the owner. There could be some formal planning in the form of cash forecasting but without a system to develop the business. Survival of the business is the major goal and the owner is still the prime mover of the business. If the business continues to survive and grows in size and profitability, it moves on to Stage 3.

Stage 3: Success

This stage of the business provides a range of alternatives to its owner, including whether to keep it stable and profitable as it is or expand it. The options include using the business as a platform for growth or a means of self-support preparatory to completely or partially disengaging from the business to pursue other interests. At this stage, the business has achieved economic health, with a size and product-market penetration that is earning average or above-average profits. The business can stay at this stage as long as it wants if it maintains its market niche and its management sustains its competitive abilities. The organisation is now large and requires functional and competent managers to take over some duties being performed by the owner. There is sufficient cash flow to cover current costs and avoid a crunch in rough times. Financial, marketing and production systems are in place. There is planning of operational budgets and delegation of functions. The owner and the business are increasingly moving apart because of the presence of other managers.

Stage 4: Acceleration

The problems at this stage include how to grow quickly and how to finance the growth. The most important issues are delegation and financing. This involves the owner delegating responsibility to others to improve the managerial effectiveness of a fast-growing and increasingly complex business. This will put controls on performance and, without abdication, leave room for mistakes to be made. Furthermore, there is a need for enough cash to satisfy the demands of growth and a cash flow that is matched by adequate expense controls. With a decentralised organisation, with clear divisions, the senior managers are competent to handle a growing and complex business. The growth has stretched the systems, and both operational and strategic planning have been completed. While the business is dominated by the owner’s shareholding and presence, the business and the owner are reasonably separate. If the owner rises to the challenges of finding the funding and management to grow the business, it can evolve into a big and mature business.

Stage 5: Maturity

The greatest concern of a business at this stage is how to consolidate and control its financial gains without losing the advantages of small size and flexibility of the entrepreneurial spirit. The business will need to strengthen the human resource team and professionalise the management of the business, by use of budgets and standard cost systems. The business has the staff and financial resources to create and execute detailed operational and strategic plans. Systems are extensive and developed. The owner and the business are separate, financially and operationally. The business has arrived and has the advantages of size, financial resources and executive talent. Its entrepreneurial spirit makes it a formidable force in the market.

As Small Business Owners must know, starting a business requires an ability to do something well, a good marketable idea, high energy, favourable cash flow or a large sum of cash on hand. A Small Business Owner also needs well-developed people-management skills, good information systems and budget controls. The stage of development of a business determines the managerial factors that you will have to deal with. Knowing the stage of your growth will help you to make more informed choices and get prepared for the challenges at hand.

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Five Stages Of Growing A Small Business was originally published on The Business Builders