The Five stages of small business growth

At first, glance, categorizing small businesses’ problems and growth patterns systematically helpful to entrepreneurs appears to be an impossible task. The size and capacity for growth of small companies vary greatly.

However, upon closer inspection, it becomes clear that they share common issues that arise at similar stages of development. These similarities organize into a framework that improves our understanding of businesses’ nature, characteristics, and problems ranging from a corner dry cleaning shop with two or three minimum-wage employees to a $20 million-a-year computer software company with a 40% annual growth rate. Such understanding can help small business owners and managers assess current challenges, such as the need to upgrade an existing computer system or hire and train second-level managers to maintain planned growth.

It can assist in anticipating critical requirements at various points, such as the excessive time commitment for owners during the start-up period and the need for delegation and changes in their managerial roles as businesses grow larger and more complex. The framework also serves as a foundation for assessing the impact of existing and proposed government regulations and policies on one’s business. An exemption of dividends from double taxation is an excellent example of benefiting a profitable, mature, and stable business like a funeral home.

Finally, the framework helps accountants and consultants diagnose problems and match solutions to smaller businesses. Advice based on a 30-year-old, 100-person manufacturing company rarely addresses the issues of a 6-month-old, 20-person business. The former prioritizes cash-flow planning; the latter prioritizes strategic planning and budgeting to achieve coordination and operational control.

Developing a small business framework

Various researchers have developed models for analyzing businesses over the years. Each considers business size to be one dimension and company maturity or stage of growth to be a second. While these frameworks are beneficial in many ways, they are not appropriate for small businesses on at least three counts. For starters, they believe that a company must grow and progress through all stages of development or perish in the attempt. Second, the models fail to capture the critical early stages in the origin and growth of a company. Third, these frameworks define company size primarily in terms of annual sales (though some include employee count) and ignore other factors such as value-added, number of locations, the complexity of product line, and rate of change in products or manufacturing technology.

Existence

The organization is straightforward—the owner does everything and directly supervises subordinates, which should be competent at the very least. Systems and formal planning are either non-existent or minimal. The company’s strategy is to stay alive. The owner is the business, performs all of the essential tasks, and is the primary source of energy, direction, and capital, with the help of relatives and friends. Companies in the Existence Stage range from newly opened restaurants and retail stores to high-tech manufacturers who have yet to stabilize production or product quality. Many of these businesses never gain enough customer acceptance or product capability to become viable.

Success

At this point, owners must decide whether to capitalize on the company’s achievements and expand or keep the company stable and profitable, providing a foundation for alternative owner activities. A critical decision is whether to use the company as a means of support for the owners. Behind the disengagement may be a desire to start new businesses, run for political office, or pursue hobbies and other outside interests while keeping the business relatively stable. The owner consolidates the company and marshals resources for growth during the Success-Growth substage. The owner took the company’s cash, established borrowing power, and risks it all to finance growth. Among the critical tasks are ensuring that the core business remains profitable so that it does not exhaust its cash reserves and developing managers to meet the needs of the expanding industry. This second task necessitates hiring managers who look to the future rather than the present. Systems should install with future requirements in mind.

Cash

The organization is decentralized and, to some extent, divisionally sized—usually in sales or production. To manage a growing and complex business environment, key managers must be highly competent. Growth is causing the systems to become more refined and extensive. Even though the owner and the business have become reasonably separated, the company dominate by the owner’s presence and stock control. If the company fails to make it big, it may retrench and remain a successful and significant company in an equilibrium state.

Resource Maturity

The primary concerns entering this stage are to consolidate and control the financial gains brought on by rapid growth. Second, to retain the benefits of small sizes, such as flexibility of response and entrepreneurial spirit. The corporation must rapidly expand its management force to eliminate the inefficiencies that growth can cause and professionalize the company through tools such as budgets, strategic planning, management by objectives, and standard cost systems—all while retaining its entrepreneurial qualities.

Stage V has the personnel and financial resources to conduct in-depth operational and strategic planning. Management is decentralized, well-staffed, and well-experienced. And the systems are comprehensive and well-developed.

To sum up

The company’s development stage determines the organizational factors that must address. Its plans help decide which elements will have to deal with in the end. Knowing its current growth and programs allows managers, consultants, and investors to make more informed decisions and better prepare themselves and their companies for future challenges. While each business is unique in many ways, they all face similar problems and are subject to significant change. That could be why being a business owner is both enjoyable and challenging.

Although a factor is rarely more than one stage ahead or behind the company, an imbalance of elements can cause severe issues for the entrepreneur. Indeed, one of the significant challenges in a small business is that the problems encountered and the skills required to deal with them change as the company grows. As a result, owners must anticipate and manage the factors as they become relevant to the business.

High-tech start-ups appear to be another exception. These are prominent companies, such as computer software firms, genetic-engineering firms, or laser-development firms, that pique the investment community’s interest. Entrepreneurs and investors who start them frequently intend to increase before going public or being sold to other corporations. This strategy necessitates acquiring a permanent source of outside capital almost from the start.