You’ve probably heard of the four stages of a business life cycle: startup, growth, maturity, and renewal (or decline). These stages represent the different phases your company goes through as it progresses from idea to launch and beyond. It’s important to keep in mind that every business is unique—and so are its challenges. You may have been able to grow sales quickly in phase two due to an innovative product or service offering; however, you may face difficulties later when needing more capital to develop new features for customers.
Within each business stage, there are common pitfalls that—with proper planning—can be smoothed over or even avoided.
Phase 1: Startup phase
The startup stage is the one most people think about when they think about forming a company (and rightly so—it's an exciting time). But startups can face some serious foundational and financial challenges. One-third of new businesses fail during this stage—and when you’re in the thick of it, it’s not hard to understand why.
Common issues can include cash flow problems or having too much debt on the balance sheets. Startup companies also often require additional funding as they try to scale up their operations and reach new markets. Moreover, they may encounter regulatory hurdles that could delay their launch or expansion plans, which could impact revenue generation altogether. At this stage, we suggest leaders put as much effort as possible into identifying and securing ideal clients to gain a foothold in the market and managing cash flow closely.
Some companies survive this phase successfully by raising more capital through venture capitalists or even issuing stock publicly via an initial public offering (IPO). However, many startups fail during this phase due to a lack of capital or poor management decisions, making them financially unstable in the long term.
While this is a risky and chaotic time during a business’ life, it is ripe with experimentation and opportunity. The key to success is using that to the company’s advantage. Turn what’s been proven to work into standard operating procedures that can be relied on in the future.
Phase 2: Growth and scale
At the growth stage, a business really starts to ramp up and gain momentum. The organization has achieved a strong customer base, a solid team, and processes to deliver its product or services. In other words, it’s experiencing rapid growth. Managing that growth is critical. This phase can get messy really quickly if business operations can’t keep up with the new business flowing in. It’s vital to have a strong grasp of the intricacies of the organization and the people within it as the company grows and becomes more complex. The goal of this stage is to have the right people, procedures, and policies in place to maximize efficiency, improve customer and employee retention, and boost the bottom line. This will not only set up the company for scale but also ensure a leg up over the competition.
Another common pitfall during this stage is failing to plan for growth. Do you have the people, process, technology, and financial wherewithal to grow? Leaders will need to consider various resources and expenditures needed for scaling – and consider their financials carefully in order to maintain profitability. This includes reviewing expenditures on marketing and sales, product or service development, personnel, and IT systems. Not all of these resources need to be internal—finding skilled vendors or outsourced services may help you fill a talent or skill gap at a fraction of the cost.
Constant investment and reinvestment are the name of the game at this juncture.
Determining whether those investments are sound ones, however, is also critical. Leaders need to make decisions and assess opportunities based on accurate financial data. For example, with limited resources, companies may opt to pass up promising opportunities if pursuing them would mean starving the core business of essential funds. As a company continues to grow, focused operational and financial planning could be the key to longevity. Invest in the company’s brand and mission—including defining and hiring top talent or outside support.
Phase 3: Maturity and maintenance
At this phase, the company feels strong, profitable, and secure. Maintenance does not mean stagnation—a company can continue to grow during this phase—but the rapid change and defining moments we saw are in the past. It’s important not to get complacent during this stage—a business is still very vulnerable to competition and marketplace changes. To maintain stability, distribute attention and resources throughout the organization’s product/service portfolio and focus on growing the customer base.
As such, a top challenge is marketing. In this stage, customers are not just satisfied with a company's products or services; they want to know that you can be trusted. For example, if you're selling a product that requires regular maintenance, it would be smart for you to tell your customers about how easy it is for them to get the service and repair done at your store.
This stage may also be an ideal time for businesses to innovate. Leaders should look for ways to improve upon what they already have in terms of product offerings or services so that the company can continue growing without any problems in the future. This might mean creating new products or even adding more features to existing ones.
The third challenge during maturity is budgeting and forecasting. Because you have more money coming in than ever before, it's important to make sure that all those dollars are being spent wisely so they go toward building future success. Moreover, mature businesses are prime for investors who crave predictable revenue. One way around this problem might involve hiring an outside consultant who understands both business strategy and financial management; having someone like this on staff can ensure proper oversight without taking away from other areas where skill sets may be lacking.
Phase 4: Renewal or decline
While every business wants to avoid a decline, it’s a common occurrence for a variety of reasons, such as:
- Not pursuing opportunities to expand during the maturity stage
- Changes to the industry affecting customer demand
- Competing businesses having better products or services
- Not reacting to technology updates or advances
It can be difficult to tell if a company is in trouble. It may feel like your customer base is growing and that you are keeping up with their demands. However, if revenue has been declining for several years, you're in decline. That is why it is critical to review your finances on a regular basis.
When a company reaches this stage in its life cycle, leaders have two choices: sell or reinvest. If deciding to sell, be sure to work with the right experts to follow state and federal finance laws to get the most value out of the company. Reinvesting in the company can result in its renewal. Ideally, start this process before a business is in full decline. Keeping a pulse on the marketplace, competitors and a company’s financial data can foreshadow a potential decline. However, if a business is already in a decline and leadership opts to reinvest, it will quickly need to figure out how to meet the target market's new needs quickly.
During this time, leadership must also look out for new growth opportunities and markets to enter. To maintain cash flow, costs must be reduced and budgets must be tightened. The decision a company makes about how to adapt will determine whether it succeeds or fails. Having an objective third party, such as a CFO consultant, may offer guidance into financial forecasts and how to shape the future of the company.
How to succeed through every business life cycle stage
Running a business brings a lot of rewards, but also many challenges. As a business evolves, different problems and opportunities demand different solutions – what worked a year ago is likely not the best approach now. All too often, avoidable mistakes turn what could have been a great business into an also-ran. Recognizing and overcoming common hazards of running a business is essential to continued success. That takes skilled planning and a true understanding of the organization’s mission, cash flow, competition, and trajectory. That is where outsourcing some of your roles may benefit you.
How can outsourcing help you? It allows you to focus on improving your business instead of worrying about every aspect of running it—including accounting, reporting, and operational planning.
According to the former CFO of Procter and Gamble, Lars Sudmann, "...the key skill of a CFO is to make sense of the business data and make those people walk through it by making them understand the meaning of the data, implications, and next steps of the journey."
At Focused Energy, we walk the journey with you. Our strategies are based on unique business needs, missions, and situations – all designed to help the company thrive.