While starting an online lead generation agency is wildly different than opening a brick-and-mortar hair salon, both small businesses go through the same five stages of growth. Understanding these stages allows entrepreneurs to anticipate challenges and plan for success.
Businesses in the Existence Stage focus on developing their concept and validating business ideas. They are often cash-flow negative and earn marginal returns on their capital and time investment.
In this stage, small-business owners focus on discovering whether their business idea is viable and acquiring the resources needed to enter the next phase. They are also concerned with establishing a customer base and generating revenue and addressing operational inefficiencies.
During this stage, business growth is slow and the company may still be running at a loss, but its survival is ensured. It is important for the owner to reconcile the demands of his business with personal goals and find ways to fuel growth sustainably.
Companies that are in this stage focus on leveraging their profitability to grow, but can run into trouble if they over-expand or if the market shifts and sales decline. The business must find a way to delegate and professionalize its management while retaining the entrepreneurial spirit that made it successful in the first place.
This is the first stage of business growth and involves a company establishing operating procedures, establishing customer retention strategies, and developing a stable revenue base. The business is still nimble and a bit risky because it requires the owner to match personal goals with those of the business.
During this stage, the business has shown that it can generate enough cash flow to survive and break even short-term. Some businesses stay in this stage for extended periods, scraping by on meager margins. Those that choose to grow further at this point may look for outside investment or pursue growth through ancillary products and services. They will also need to create staff and systems that can sustain expansion. This is a crucial time to manage the balance of growing and staying profitable.
At the success stage, a small business has established operating procedures and customer retention strategies that keep margins healthy. Revenue increases allow it to reinvest in growth and expand into new markets or products.
In this phase, management structures become more formalized, and employees take on responsibilities beyond basic administrative tasks. Business owners and founders continue to make most decisions, but they might also start exploring strategic diversification.
Companies that thrive at the success stage may grow into the resource maturity stage, which is characterized by enormous financial freedom and market control. This phase typically requires rock-solid systems and management structures that provide stability, but that are also able to adapt to rapid market changes. Otherwise, these businesses risk returning to the survival stage.
While business growth phases differ widely between businesses, there are some general patterns that can help you determine where your company is in its journey. By recognizing the five small-business growth stages, you can anticipate what your business needs to grow to its next stage and plan accordingly.
In this first phase, a company must discover whether its product or service is viable and then expand to a size that can support it. It’s not uncommon for small companies to stall at this point, earning marginal returns on their time and capital investment. Owners must learn to delegate more responsibilities and develop systems for managing rapidly expanding expenses and resources in order to move to the next stage. This is also the point when many companies turn to outside investors for capital to fuel their growth.
Once small businesses reach this stage, they are able to build significant financial resources, and management becomes decentralized. They also have the staff, managerial talent and systems to manage growth and develop detailed operational and strategic plans for the company.
But this is where the wheels can fall off, as the business can easily slip into complacency and start taking customers for granted. At this stage, nimble decision-making is key to ensuring that the business can meet customer demand and keep revenues up.
At the same time, it’s easy to lose sight of the gritty entrepreneurial soil from which your business grew and implement corporate processes that hinder collaboration and deteriorate culture. Finding the right balance between buttoned-up process and innovative chaos is vital to staying successful in this phase of business growth.