For running any small business, there are five stages of Business Growth:
Stage I. Existence
Develop first website, grass root marketing, obtain first customers and testing new marketing ideas.
Stage II. Survival
“Optimize cash flow” is critical at this stage.
Reaching this stage demonstrates that the business is a functional business entity. Its value proposition and business model are tested. ‘Mom and pop’ stores get stuck at this stage.
Key questions at this juncture are:
1. In the short run, can we generate enough cash to replace capital asset or cover major repair or renovate
2. Can we mobilize “enough money” to stay in business or grow to a size that is sufficiently large, given our industry and market niche?
Stage III. Success or Break-out
A key issue at this stage is whether to use the company as a platform for growth or as a means of support for the owners as they wholly or partially disengage from the enterprise.
Stage IV. Take Off
The focus at this stage is to grow rapidly and “finance” this rapid growth. Inorganic growth (i.e. acquisitions) require significant “financing.”
Key question: Will there be “enough cash” to satisfy the substantial demand growth brings (which often requires a willingness of the owner to tolerate a high debt-to-equity ratio. E.g., Facebook in 2010
Stage V. (last stage) – Resource maturity, IPO.
A company in Stage V has the staff and financial resources to engage in detailed operational and strategic planning. The management is decentralized, adequately staffed, and experienced. And systems are extensive and well developed. The owner and the business are quite separate, both financially and operationally. The corporation needs to preserve its entrepreneurial spirit at this stage.
While each enterprise is unique in many ways, all face similar problems, and all are subject to great changes. That may well be why being an owner is so much fun and such a challenge.
Joginder Gujral, FCMA (India)
CMA (USA), FCA (India), CPA, CA (Canada Candidate)
Source: HBR May 1983