The Business Life Cycle

There are four phases in a business life cycle, and each phase presents excitement and challenges. As a small business owner, awareness of where their business is in the life cycle provides key insight into keeping the business healthy and avoiding detrimental decisions.

Phase 1 – Start-Up

This is the “Wonder Phase” due to a lack of industry knowledge, funding, and business acumen. The wonder phase is full of questions and doubts but a lot of excitement and energy. This phase is a complex and taxing stage, requiring lots of overtime. Due to a lack of resources and planning, this stage often struggles to become a reality. Common symptoms of the wonder phase are:

1. Lack of Capital
2. No to Low Cashflow
3. Lack of Experience
4. Little to no financial information

Phase 2 – High Growth

This is the “Blunder Phase” and is where most businesses fail. The owner operates all facets of the business and is financed by personal savings/credit, family, and friends. The company is growing with substantial revenue and net profits, but cash flow is erratic and often negative. To even out the cash flow, debt increases. This creates a high debt-to-equity ratio that produces concern for lenders. The growth tends to be fast-paced and challenging to manage. Owners at this stage veer into making misinformed decisions that fail. The symptoms found in this phase tend to be:

1. Strong growth in revenue and net earnings
2. A shortage of capital to sustain the fast growth rate
3. Cash flow tends to be touch and go, at times negative
4. Management moves from reactionary to formal
5. Clearer Financial Data

Phase 4 – Maturity

This is the ideal place for a business and is the “Thunder Phase.” The business is on cruise control; cash comes in, and confident and informed decisions are made. The competition looks to the business as a model to exemplify. The sweat, blood, tears, and sleepless nights have paid off. Debts are paid down, and the net profit line grows. Staying on the peak is the challenge at this phase. Symptoms of this healthy phase are:

1. Sturdy Capital (Equity)
2. Firm and Reliable Profits
3. Cash flow is like a mighty river
4. Strong confidence and business acumen
5. UpToDate and Accurate Fiscal Information

Phase 4- Decline

Decline is inevitable for all business, even after being “King of the Mountain.” Soon, complacency sets in, adaptability is foregone, and risk tolerance decreases. This phase is the “Plunder Phase”; it starts as an owner’s age or burnout sets in. This is the time to enter a succession plan and pass the business to the next generation or sell the business for a profit. The other option is to correct and start the challenging blunder phase again. The following symptoms mark this phase:

1. Abundant capital (equity)
2. Strong but weakening cash flow
3. Firm but declining growth and profitability
4. Complacent, detached, status quo ownership
5. Adversity to risk

After reading the business life cycle phases, where in the life cycle is your small business? The ND SBDC can advise a business at any life cycle phase by providing resources to help a business transition through any phase.

(This article is based on Bech, Tracy & Duryee, David. “60 Minute CFO”. 2017)