Entrepreneurs are extremely ambitious. It is a default setting in them! They dream of taking their garage start-up to the Nigerian Stock Exchange within the first seven years of starting. This is a perfectly legitimate, even noble, ambition. However, the steps they take must be right and appropriate if they are to escape unforeseen and unexpected pitfalls that could threaten the very existence of the enterprise and cause personal distress.
As an entrepreneur, understanding business growth process and stages will help you anticipate and handle the challenges that will certainly confront you.
Defining Growth: Simply speaking, improving any preferred and identified measure of success is growth. Specifically, increasing revenue and/or profitability are the usual measures of business growth. These are ‘direct’ measures, as against other ‘indirect’ measures such as product diversification, number of employees, regional outreach, increase in asset base etc.
Different models and frameworks depicting business growth have been developed by different academics and consulting groups. Most agree that there are generally five stages of business growth. We will discuss the features of each stage and what you need to watch out for and do at those stages.
(credit: the manager.org)
Existence: This is typically an early start-up stage. It is a very risky stage where capital, expertise and even labour have to be provided by you, family and friends. There are normally only very few employees comprising of yourself and the others who may or not be sufficiently qualified for the responsibilities assigned to them. The business has a flat organisational structure and its operations are highly undocumented.At this stage, only you and may be, just may be, a few others have faith in what you want to do. Emotional strength and stamina are key to your successfully navigating through this stage.
This stage is characterised by the need to get customers and make enough sales to cover costs and make some positive net return. Your initial enthusiasm can be tested as getting positive customer response becomes more difficult than anticipated. Other times, ‘beginners luck’ makes it possible to catch a few good deals right from the beginning. Failure to attract sufficient number of customers and gain product acceptance can lead to business closure or failure.
No matter what your initial experience, what you will need to focus on the following:
- Exploring all sales leads and get as many customers as is possible,
- Ensuring you deliver on whatever and everything you agree with your customers,
- Getting cash paying customers. If you don’t have sufficient financial resources, it might be better to make cash sales at a lower margin than a credit sales at a higher margin,
- Minimising operating expenses by not expending precious finances on fancy call cards, letterheads, unnecessary vehicles etc.,
- Ensuring that most of your capital goes into revenue generating and profit making activities. Do not attempt to live ‘big’ on resources that should make money for you. Performance and delivery is what attracts customers to you at this stage and not your flamboyance,
- Not employing more hands than is absolutely necessary, etc.
The ultimate test at this stage is to establish the viability of the business. You must learn to be aggressive in getting businesses and tightfisted in expending resources at this stage. Remember that it is almost impossible to sale the business at this stage as others are simply watching you to see what you make of it.
Survival: Being at this stage demonstrates that your business is a workable entity. Sales may be erratic though, as new customers try to build confidence in patronising you. Luckily, you have at least a few regular customers who are impressed with and like you. Your organisational structure is still flat, even though you have employed a few more hands in production and sales.
You have established a certain level of viability that can make it possible for you to sale the business at this stage, but at break-even or marginal loss only. You still do not have sufficient resources for product development or diversification. It is also almost impossible for you to raise funding from banks. However, venture capitalists with a keen eye for growth and skilled at risk management may be interested in your business, although you will not get the kind of pricing you may want.
The major challenge is that you are still not yet in control of your finances. Timely cash collections remain very critical. As you have started growing and regaining your confidence from initial shocks and disappointments, you will need to focus on the following:
- Extracting more cash from your existing customers and products as introducing new products or diversification is almost impossible for you,
- Managing cash flow religiously,
- Maintaining vigilant control on expenses to compensate for increasing confidence (which might make you less cautious than is required),
- Watching out for customers who may be financially distressed and want to lure into making credit sales to them. They can ruin your finances and business, etc.
Success: Your company has passed a very critical stage and is now stable and profitable. Cash is relatively plentiful over certain periods but there is challenge to use it profitably as well as even-out the negative cash periods. Still though, this is a dilemma stage as you will need to make a very important decision on whether to lever on the accomplishments so far and launch expansionary activities or to remain as just a platform to satisfy your modest personal ambitions.
Functional executives and at least a first staff manager are now required and should be employed if the company is to grow past this stage. Planning, budgeting, recruitment should now be formalised. Executive staff meetings should also now be taking place regularly and senior management must be adept at delegating critical assignments to their subordinates and demanding results. Resources can now be raised, both internally and, limited amounts, from the banks to fund expansionary activities. The business can safely diversify into other products in the same industry.
Things are getting a lot more interesting this stage, and you should ensure that:
- Your growth ambitions do not go beyond your capacity to raise funding. Overtrading is dangerous,
- You do not loose your profit making focus,
- Your management team comprise of a healthy balance of people who are ambitious for growth and those cautious to maintain reasonable cash balance and profitability,
- Operational planning and control are an absolute must,
- You deliberately work to develop yourself into leading the company beyond this stage or step aside, etc.
Take-off: The business has now established a good level of performance credibility within its circle. You are profitable with good cash levels, and your business name is getting to be well known and respected in the industry. You and your executives are becoming a lot more confident. You can see various opportunities ahead but need additional massive resources to fund your now ambitious and rapid growth. You can also raise the funds you need to grow into a regional or national brand from banks. Venture capitalists can also fund you at much better pricing terms as they can now see clearly where you are headed.
- Some of your professional managers might need to be replaced or redeployed as they are not as ambitious or as competent as required for this stage and beyond,
- You now have middle level managers who can shoulder the responsibilies of delegated duties as well as supervise the junior staff you once supervised directly.Your organisational structure is not flat anymore,
- You will need a tolerance for high debt-to-equity ratio. But this must be done sensibly without putting the business on the line,
- You can, and should negotiate better terms with creditors and investors,
- Remain fully in touch with your customers, etc.
This is not the best stage to sell your business, as you are all primed to make it really big. You could however sell a reasonable percentage that retains control for you, but brings on board more experienced entrepreneurs and professionals who can help you follow a properly chartered course. This is also a stage where you need to be aware of your capabilities and limitations. You can withdraw and allow the professionals and more competent entrepreneurs take over whislt still retaining reasonable ownership of your business. Remember that 10% of a bloody good business is better than 100% of a failed one.
Maturity: Succeeding beyond the takeoff stage, your business will be awash with massive financial resources, experienced, competent and confident employees, as well as several diversification opportunities. As with all other stages, you will need to balance ambition with level headedness. Your business is beginning to mature now and you are beginning to get invitations to trade events and talk shows . You have many customers and generate large cash volumes. This is therefore a stage that requires control and consolidation.
Opportunities will be offered to you from different sources and you must learn be adept at throwing away businesses that will take you away from your core. Your challenges at this stage will be to ensure continuous business ‘self-renewal’ so as to continue growing whilst avoiding ossification by:
- Cautiously venturing into other businesses,
- Maintaining the agility of the small business you once were whilst managing massive resources to grow,
- Eliminating and keeping a tab on inefficiencies that growth normally brings about,
- Strategic planning to maintain focus is an absolute must,
- Management should be decentralised wherever necessary without blowing overhead costs, etc.
No matter your business stage, a few things are important and necessary:
- Be sure of exactly what you want to achieve at that stage,
- Be clear about the challenges at that stage,
- Identify the resources you require to address the challenges and achieve the objectives,
- Work to raise those resources and diligently protect them,
- Build and maintain your and your business credibility at all costs,
- Human and financial resources must be judiciously used,
- Seize opportunities without putting the business on the line,
- Have faith, confidence and trust in yourself and your team.