Understanding the Five Stages of Business Growth
While small businesses have unique characteristics, depending on their size, product or service offering, target market, and niche, they all have similar business growth stages. A one-woman online shop selling children’s clothing differs from a ten-person digital marketing agency. Still, both are considered small businesses and will go through similar growth phases.
What are the stages of business growth?
According to the Harvard Business Review, there are five business growth stages that all small businesses go through:
The first stage of small business growth is Existence. This stage is when the business has just started, and the main problems are acquiring customers, and ensuring the company can successfully deliver the goods or services it offers.
During this stage, only one or two people are usually running the business. The founders or owners do everything from marketing to accounting to customer service. Many small businesses in this business growth stage are not yet making money. They either take a loan, use their personal funds as initial investment, or raise money and give out company shares.
The business’s primary goal is to stay afloat and, as the term suggests, exist. Sometimes, businesses can fold during this stage, when capital and cash run out. Sometimes, the owners decide to close the company because of the pressure it puts on their finances, time and energy.
If a small business makes it through the first stage, they move on to the next step of business growth; survival. When a business has a consistent pool of customers, and your company is running smoothly, you’ll now start looking at the relationship between expenses and revenue. Can your business generate enough cash to continue operating and make a profit?
The organisational chart is still relatively simple in this growth stage. The founder or owner still make most of the business decisions. As the stage is called, the main goal is for the business to survive. Many firms or companies stay at the Survival stage for a long time and go out of business when the owner decides to close the business or retire. “Mom and pop” stores typically stay in this stage indefinitely.
The third business growth stage is Success. As the name suggests, the company is established, and you have a consistent and growing customer base. Your profit margins are also average or above average. The business is running itself with help from you and your team of employees.
The question for small businesses at this stage of small business growth, is ‘what should they do next?’ This depends on what the owners or founders want the company to be. Do they want it to grow, which can be high-risk but with high reward, or do they want it to continue being stable and profitable at its current size, which offers lower risk and lower reward?
To grow, a small business will need more capital and investment. Profits will be used to grow, and the owner might need to take out a loan to finance expansion. New managers are brought in, and more employees are hired to sustain operations.
On the other hand, the business owners may want to maintain the current business as is. They also might want time to do other things, whether starting a new small business or spending more time with their family, while delegating more of their tasks to other employees.
If you decide to invest your company’s profits into growing your business, you’ll be in the Take-off stage. During this business growth stage, the small business can experience accelerated growth in a short time. This is one of the business growth stages that is the most exciting, but can also be nerve-wracking. You’ll need a lot of cash and capital to continue paying your overhead expenses, such as employees, rent, suppliers, and more.
At the same time, it is an exciting time for your business, that can make or break your long-term plans. You’ll need to ensure the company’s management, whether by the original owner or new employees, is ready to take the business to the next level. The management team must be able to meet the challenges of a growing company and successfully drive it towards becoming a big business.
If the owner realises that he can’t bring it to the next stage, and is unwilling or unable to find the right employees, they can also sell the business at a profit. Those who make it to this stage are not guaranteed to make it to the fifth and final business growth stage. Sometimes, the business runs out of cash, or the owner cannot delegate correctly to keep the company growing.
5. Resource Maturity
The last of the business growth stages is Resource Maturity. After all the hard work and effort of the previous business growth stages, your company is now stable enough. It has the resources for strategic planning to help plan for its future. Typically, one of the main concerns of businesses reaching this stage is ‘proper’ management. The company that gets to this stage must evaluate the management of the financial gains made over the last few stages.
Whether you manage your company yourself or entrust management to a team of professionals, the company’s goal is longevity. Are there carefully planned systems to help the company maintain its current status quo? Are there strategic plans in place to continue the company’s success?
Business Life Cycle
The business life cycle is similar to a small business’s growth stages, but are not exactly the same. The four typical stages of the business life cycle are the following:
The Startup stage is similar to the first stage of small business growth, Existence. This is the first stage of any business, big or small. The company is just starting. There are few processes because the owners still do everything themselves, and the business is still learning about its market and how to make a profit.
Here, the business is more stable than in the first stage. The company has a steady customer base and enough cash to pay for overhead expenses. This is when a business begins to make a name in the marketplace and gain brand recognition. The company also begins to hire more people and continues to grow.
This stage requires capital and investment. The company must reinvest its profits back into the business, find new investors, or take on debt to continue growing.
At this stage, the business is running smoothly, almost on cruise control. Employees are staying longer, as long as eight to ten years. Business owners feel secure enough to declare regular dividends. Businesses at this stage are consistent and dependable. Operations are steady, and employees are generally happy.
At this stage, a business must decide if they are content staying the same or need to further reinvest in the business to continue growing. Another option is to sell the business at a profit, and the owner can focus on other things, whether starting another company or on personal matters.
4. Renewal/Rebirth or Decline
After the Maturity stage of the business life cycle is the Renewal/Rebirth or Decline stage. This stage can sometimes creep up on owners, and they don’t realise the business needs attention. However, if revenue has been declining, it’s a good indication that the company is in this crucial stage.
At this point, the business needs to decide whether to innovate and invest in new people or marketing that can lead to the Renewal or Rebirth of the business. The company owners must determine if they will invest the time and effort to reinvent the business or cash out. On the other hand, if this is not an option for the company owners, then the business will be in Decline.
How Do I Know Which Stage My Business is At?
There are a few ways to determine your company’s growth phase. Some business owners might be unsure which stage their business is at.
Of course, if you are just starting and you are in the process of getting clients and customers, it is you mostly doing all the work, and the business is just a few months old, you’re at the Existence stage.
You’re at the Survival stage if you have a steady income and your revenues are generally higher than your expenses. This also means you have a few employees, more than enough cash for overhead expenses, and your business is consistent or even growing.
When your business is doing well, and you have the options to cruise along or grow, your company is at the Success stage of small business growth. Another sign of this stage is if you have enough cash and employees to maintain the business, but you’ll need additional capital and investment to grow.
Your business is at the Take-off stage when you are reinvesting into the company, and it is experiencing rapid growth. You are consciously growing the business and taking the proper steps to bring it to the next level
When you successfully navigate the Take-off stage and your company is bigger yet stable and consistently making money, you are at the Resource Maturity Stage. The business has enough resources to continue planning for the future and what’s next for the company.
No matter what business growth stage your business is in, District32 can help you navigate each growth phase and support your company to the next level. Click here to read more about how we can help you.