Business cycles chart the ups and downs of an economy, and understanding them can lead to better financial decisions for your business.
Each business cycle involves different phases: expansion, peak, contraction, trough and recovery. They don’t occur at regular intervals, but they do have recognizable indicators.
While the government more or less manages the business cycle which is also known as economic cycle or trade cycle, businesses respond differently to the different phases in the business cycle.
Businesses also have lifecycles that start from the moment you make the decision to set up a business.
A business progresses from one phase to another over time. The entire progression from first phase to last phase is called a business lifecycle. It is most often likened to a tree’s lifecycle. A tree starts as a seedling, then sprouts, grows for some time, and then matures. It requires different types and amounts of resources and attention throughout the different stages of its lifecycle. The same principle applies to a business.
Understanding the different stages of the business lifecycle will help you prepare for the obstacles that your business will need to conquer in order to succeed at each stage.
Companies encounter challenges and experience pain as they try to grow from one phase to the other during the business growth process, whether attempting to improve profitability, increase number of branches, recruit additional staff or increase market share.
Below are the different phases of a business lifecycle showing the peculiar challenges for each phase. Our Business Advisory Services will help guide your business focus for each of the phases, developing the right strategy and pointing you to appropriate sources of funding, while keeping a close watch on the pathways to achieving your business goal.
Stage 1: Seed And Development
The seed stage of a business lifecycle is when your business is just a thought or an idea, before it is officially in existence. You have your business idea, but first you must assess just how viable it is likely to be.
At this stage, challenges include lack of a proper feasibility report, inability to match existing abilities to the required skills for the business, the readiness of the proposed market for the business idea and, the financial resources in place.
At this stage of the business the focus should be on documenting a detailed feasibility report, matching the business opportunity with the sponsors skills, experience, and passions, finding professional advisors, writing a business plan and deciding on ownership structure.
Stage 2: Startup
At the start up stage, the feasibility report has given a green light and the business now exists in legal terms. Products or services are in production, and the first set of customers are being serviced.
It is believed by some thatthis is the riskiest stage of the entire lifecycle, as mistakes made at this stage can negatively impact the company years down the line, leading to business failure. The challenges here includes conserving cash flow and establishing a customer base and market presence. This should therefore be the focus.
Stage 3: Growth
The challenges in this stage revolve around the inability to professionally handle an ever-increasing list of issues and demands – like handling increased revenues, increased customer base, increasing competition and the need to expand your workforce. The focus here should be on running the business in a more formal way.
At this stage, Revenues and customers are increasing consistently with many new opportunities. Profits are improving slowly and steadily, but the competition is surfacing.
Stage 4: Establishment
At this stage, the business has now matured into a thriving company with a place in the market and loyal customers. Sales growth is not explosive but manageable. Business life has become more routine.
The challenge here is the temptation to rest upon your oars instead of staying focused on the bigger picture and improving on productivity. Focus should be given to automation and outsourcing to improve productivity.
Stage 5: Expansion
The expansion stage is characterized by a new period of growth into new markets and distribution channels. Decision is made to gain a larger market share and find new revenue and profit channels.
Challenges here include a lack of ability to carry out appropriate planning and research for the planned expansion. The focus in this phase should be on taking advantage of existing capabilities and experience.
Stage 6: Decline
Changes in the economy, society, or market conditions can trigger this stage bringing about decrease sales and profits. If not handled appropriately, it can lead to the end of small companies.
Challenges here include inability to handle dropping sales, profits, and negative cash flow. The focus now should be cutting costs and finding ways to sustain cash flow and searching for new opportunities and business ventures.
Stage 7: Exit
At this stage consider the opportunity for the business owners to cash out on all the effort and years of hard work through a partial or full sale or completely shutting down the business.
The challenge here is getting a realistic valuation and this should be the focus in the case of a sale. If the option is a complete shutdown, then the challenge will be dealing with all aspects of a business loss.
Not all businesses experience every stage of the business life cycle. What you focus on today in any stage may not be what’s important tomorrow, and challenges require different approaches to successfully meander through each phase. You require skills to understand the market and anticipate possible challenges while identifying appropriate financing sources. Better still you need to be guided by a business advisor. Contact us for business diagnosis and advisory. We help you create value.
By Imaobong Amaechi
