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5 Stages of the Business Cycle: Where Do You Stand?

Benjamin Shabat
Benjamin Shabat  |  December 4, 2019

Prospective business owners go through several stages in the journey to turn their initial ideas into thriving enterprises. 

The path from concept to success has been trekked by many entrepreneurs, so there’s no need to reinvent the wheel when developing your business.

Data gathered by the Bureau of Labor Statistics shows that for every 100 small businesses started, only 50 will survive up to five years, and only 30 will survive to year 10. And although different obstacles are present from one industry to the next, commonalities remain in the types of problems that every business must solve in order to continue its development.

Learning about the different stages of small business growth and what it takes to make it from one to the next will help business owners anticipate, address, and overcome the challenges they’ll likely face each step along the way. Use the information below to get a firm grasp of the business cycle so that you can dodge those high failure rates and ensure that your business survives and thrives in the long run.

Stages of the small business cycle

Typically, small business development follows these stages: creativity, direction, success, expansion, and decline or collaboration. Let’s break each step down.

1. Creativity

Every business starts as a concept. In this first stage in the business cycle, the key is to come up with a creative idea for a product or service that has a viable target customer base in a market that has room for you to enter.

The goal is straightforward: keep the fledgling business alive and not fail before ever getting settled.

In this first step, nearly all of the business operation responsibilities are placed exclusively on the owner, who essentially is the entire business. Fundamental business duties are carried out by the owner, who decides where the business heads, how it plans to get there, and where it will find the funds necessary to succeed (occasionally with help from friends, family, or angel investors). At this stage, small business owners may have a few employees whose operations they directly oversee.

Maintaining existence at this early stage will mean answering the following questions: 

Is there enough demand for my product or service?
Will I be able to deliver my product or service efficiently enough to maintain high sales?
Is the concept scalable? (Can it generate profit and be expanded to a wider customer base?)
Do I have enough money to cover the multiplicity of costs involved in a startup?

Issues that you may face at this stage of the business lifecycle include: 

Inability to develop systems that guarantee consistent production rates and quality of service
Lack of interest from your target customer base, which limits customer generation, sales, and retention
Not enough capital to keep the business going
Too much pressure on the business owner to efficiently manage time and resources

If you’re successful in getting your foundation set in the first stage of the small business growth, you’ll be able to move on to the second stage which is focused more on balancing business finance.

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2. Direction

You’ve made it to the second stage of small business growth by proving the viability of your business concept. Your customer base is large enough, and they’re interested and accepting of your products or services to the point where you’re able to turn a profit. New opportunities arise, but so do new issues. The key to making it through this second stage of small business growth successfully is to define the direction you wish to take the company and differentiating yourself from the competition.

This is the stage to grow and strengthen the business by turning your attention towards some of the finer details of management, including managing your personnel, cash flow, and distribution. The sources of capital will begin to diversify to include customers, investors, grants, and alternative business loans.

While the number of employees will continue to be relatively few, they will begin to fill multiple roles. There may also be mid-level managers added to the structure who will take over some of the responsibilities from the owner.

A clearer assessment of revenues and expenses will also be developed in this stage of business growth so that you can generate accurate sales forecasts. That will make it easier to keep the books balanced so that you can cover the costs of assets and labor and maintain positive cash flow.

Distribution of products or services will need to be more formalized so that the number of customers and sales can continue to climb. That means, among other things, designing a strong marketing strategy to expand your business’s reach in the niche market you entered in the first stage.

3. Success

At this stage in a business’s cycle, real economic stability has been reached. Market penetration has been achieved to a degree where the profits are strong, but competition is beginning to catch up. The goal here is to maintain the status quo (i.e. profitability and stability) so that you can begin focusing on responsibilities other than those involved in the daily happenings of the company.

The key in this stage of small business growth is to focus on strategies for continued success. That will include the handing over of most responsibilities to upper-level managers who can oversee their respective departments, as well as much more systematization of fundamental company operations. 

Theoretically, the business could remain at this stage indefinitely, provided that you’re able to avoid the common reasons that small businesses fail such as losing sight of how to guarantee customer satisfaction or lack of effective leadership.

Yet, the market environment will inevitably face changes. So, even if your market position may feel secure at this particular period, long-term success will require that you stay on the lookout for signs that it’s time to either expand into a new market territory (grow beyond your niche) or invest more into the business to maintain growth.

The alternative options would be to cease growth at this stage by either partially disengaging from the business and keeping the status quo as a form of residual income, or completely disengaging from the business and selling it off.

4. Expansion

The fourth stage of small business growth is one where you’ll have to refortify your business plan so that it can handle the costs and stresses involved in rapid growth. In other words, it’s time to scale your business. Doing so entails increasing the business’s reach into new markets, attracting new customers, and developing new products and services (and new ways to sell them).

Related content: Elements of a Business Plan →

The key to expanding successfully is keeping the right pace and the right direction; moving too quickly or into an unviable area can lead the business to a point where funds dry out more quickly than they can be replenished. Though it is cliche, the old idea of not biting off more than you can chew holds very true at this stage in the business cycle.

How can you avoid moving too fast in your business expansion? Delegate more and more tasks and responsibilities to top-level managers so that you may reallocate your time and energy to obtaining the cash necessary to fund the expansion. At this stage, funds are typically obtained from new investors, partners, joint ventures, or business funding.

Expansion, if managed wisely, will lead to business maturity. By then, you’ll have established strategies to keep profits strong without losing the resourcefulness that has allowed you to stay ahead in the race.

It will take continued creativity to manage the never-ending changes and obstacles that approach the business. Each of those hurdles presents a potential failure for the business. That being the case, you may decide to cash out and exit while the company is still strong. The alternative is to enter a decline.

5. Decline or collaboration

As changes accumulate in the market, the economy at large, and society in general, some small businesses may not be able to make the necessary adjustments quickly enough to keep the revenue flowing as it used to. When a business plan may have succeeded for so long, it’s not uncommon to see business owners display a lack of innovative thinking or reluctance to make risky decisions.

This stage in the business cycle can leave owners in a difficult position, but it’s important that you’re able to recognize a decline when it happens so that you can rebound, or at least cut your losses.

The key is to overcome the psychological and financial stresses that are part of this stage of small business growth. At first, you’ll likely try to make changes to your business plan in an attempt to reduce costs and revitalize cash flow. But if you reach a point where those recalibrations have failed to meet intended goals, you may want to consider selling the company altogether.

Try to avoid the mistakes of either waiting too long to sell or rushing too quickly to sell. You’ve invested innumerable hours and dollars into your business, so you’ll want to get the most value when exiting. Make sure that the operations are up to par and that any wrinkles are ironed out so that the business’s real worth is clear to potential buyers.

Keeping perspective

Which stage of small business growth is your company currently in? If you’re able to answer that question, you’re already on your way to success.

It’s true that on occasion, the daily grind can get in the way of a business owner focusing on the bigger picture; it’s crucial not to get distracted from what needs to be done in the long run. Staying aware of which stage of small business growth your company is in will make it easier for you to do just that.

Business plan consulting can help you make sure your business is on the right track. Find the right one for your needs today – only on G2. 

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Benjamin Shabat
Author

Benjamin Shabat

Benjamin Shabat is a writer at Become, a technology company committed to creating a better world of funding for businesses. Using advanced algorithms, Become provides businesses with tools to improve their fundability and a marketplace to easily compare and choose the best possible funding options.