Every business goes through seven phases of a life cycle. These phases are the idea, start-up, growth, established, expansion, decline, and exit stages. The knowledge of what phase a business is in makes a huge impact on strategic planning and business operations.
What matters today may not necessarily matter tomorrow, and the challenges will change and will require a different approach to be successful. So, business needs to foresee the forthcoming challenges and financial sources so that they can complete each stage of the business cycle successfully.
- Stages of Business Life Cycle
- The Idea or The Development or The Seed Stage
- Start-Up Stage
- Growth Stage
- Established Stage
- Expansion Stage
- Decline stage
- Exit stage
Stages of Business Life Cycle
The Idea or The Development or The Seed Stage
The idea or seed stage is the beginning of the business life cycle. This is when the business is just a thought or an idea and requires several rounds of testing in its initial stage. For testing the business idea, one needs to conduct industry research, and gather feedback from friends, family, industry specialists, etc. This helps to determine whether the idea is worth pursuing or not. If it is worth pursuing, it gives birth to a new business.
The main challenge that the seed stage companies have in gaining business momentum is of market acceptance and to follow one niche opportunity. The money and the time resources are very few, so there should be the optimum utilization of these resources.
The business should focus on matching the opportunities available with the skills, experience, and passion at the seed stage. The other points to focus on are deciding the business structure, finding professional advisors, and business planning.
Source of Money
The business in its early life does not have a market or customers. They need to rely on the support (money) from the owners, friends, and family. The other potential sources can be suppliers, customers, and grants from the government.
It has already been decided that the business idea is worth pursuing, and now the business gets a legal identity. The business is now ready to sell products and services to its customers. At this stage, the business makes changes in the products and services according to the feedback from the first paying customers and the market demand. The business learns to adjust the business model to ensure profitability and meet the customer’s expectations.
When the business is in the startup stage, it is likely that the need for money and the time to market is overestimated. The main challenge in this stage is not to burn through the little cash the business has. It is necessary to learn the client’s profitable needs and do a reality check to see if the business is on the right track.
The focus on this stage should be on establishing a consumer base and a presence in the market, besides tracking and conserving cash flow.
Source of Money
The sources of finance for the startup stage are the same as that of the seed stage (owner, friends, family, government grants).
The business has made it through the initial stage (the startup stage) and is currently in its growth or survival stage. The business is adding new customers and generating revenue consistently. This revenue will help pay the operating expenses and open new opportunities for the business. The business in this stage may be operating at a net loss or could be maintaining a healthy profit. At this point, the competition starts surfacing.
The biggest challenge at this stage is dealing with the regular variety of issues bidding for more time and money. Effective management is required along with the new, improved business plan. The business needs to learn to train the employees and delegate the work to conquer this stage.
In the growth stage of the business life cycle, the main focus is on running the business in a proper manner to deal with the increase in sales and customers. Existing accounting and management systems need to be improved. To deal with the influx of business, new capable employees need to be hired.
Source of money
The sources of money at this stage are banks, profits, grants, partnerships, and leasing options.
The business in this stage has matured into a successful company with a place in the market and has devoted customers. The sales growth is not explosive but controllable. Therefore, business life will become more of a routine.
It is too easy to relax on the success at this stage of the life cycle; the market is persistent, and competition is cutthroat. The business should keep its focus on the bigger picture. The issues of economy, competitors, or the changing tastes of the customers can quickly end all that it has worked for.
The business in the established stage should keep the focus on improvement and productivity. Competing in the established market requires enhanced business practices and computerization, and outsourcing to improve production.
Source of money
The banks, profits earned, government, and investors are the major source of money.
This stage is characterized by a new phase of development in the new markets and distribution channels. The business now enters into the new markets and distributes its products to new clientele. Much like the early stages of the business life cycle, this stage also requires a great deal of preparation and research, and money.
Expanding in the new markets requires planning and extensive research. The focus should be on businesses that complement the existing experience and capabilities. The move into the dissimilar areas can be terrible.
The business should add new products or services to existing markets or should expand the existing business into the new markets and consumer types.
Source of money
The joint ventures, banks, licensing, new investors, and partners are the money sources for the business in the expansion stage.
Most businesses do not stand the trial of time- at least not the trial of all time. Outside influences, such as societal changes and the economy, affect the business. They can send the business into a stage of decline. The business starts to lose money at this stage. It’s just a matter of time before they move into the final stage of the business life cycle.
The challenges that the business has to face in this stage are dropping sales, reduced profits, and negative cash flow. The major issue is how long the business can stand the negative cash flow.
The business should look for new opportunities and business ventures. Cost-cutting and finding a way to sustain the cash flow are important for the declining stage.
Source of money
The suppliers, customers, and the owners are the sources from which the business can get money.
It is sad that the business can not keep going forever. There are two things the company can do at this point: it can sell the business or shut it down for good. If it chooses to sell the business, it requires calculating the business’s worth.
Selling a business requires a realistic valuation. It may have been years of hard work to build a business, but at the time of selling, we think about the real value at the current marketplace. If the business is to be shut, we deal with the financial and psychological aspects (of people involved like employees)of a business loss.
The proper valuation of the business should be done. The business operations, management, and competitive barriers should be looked at to make the company worth more to the buyers. Draw the legal buy-sell agreement along with the business transition plan.
Source of money
Find a business valuation partner. The company should consult with the accountant and the financial advisors regarding the best tax strategies for selling or closing the business.
Each stage of the business lifecycle may not take place in sequential order. Some businesses will be “build to flip,” i.e., going quickly from the startup stage to exit the stage. At the same time, others will choose to steer clear of expansion and continue in the established stage.
Whether the business is a radiant success or a miserable failure depends on its ability to adapt to its changing life cycle. What you focus on and overcome today is going to change. The knowledge of the position of the company in the business life cycle will help to anticipate the challenges and to make the best business decisions.
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