Find your business life cycle
Posted 08 Nov 12
Business development generally mirrors the human life cycle; moving from start up through growth to maturity and then renewal or exit.
Although businesses don't always move smoothly through all stages, the life cycle can be a useful way to think about business issues and provide a practical structure for decision making and planning.
To navigate effectively through the financial challenges of each stage, consider:
The goal is simple; survive long enough to establish a viable and sustainable market for your product or service. At this stage, cash tends to move in one direction - out. The financial challenge is to make cash reserves last and move out of this stage as quickly as possible.
Tips for Surviving Start Up:
- Undertake some low cost market research before you start - be focused on finding a viable market and only spend money in ways that move the business towards this.
- Obtain enough funding and be prepared for it to cost significantly more than the initial plan suggests.
- Have a clear strategy and end goal in mind to ensure focus is maintained.
The business has survived the initial struggle and sales growth is underway. Growing the business means a focus on gaining more customers and keeping them satisfied - which often requires a spend on staff, stock and expenses.
A strong debtor policy at this stage is vital to reduce the delay between making a sale and getting paid.
If cash surpluses occur, it's important to remember this will be needed in future. Leave enough cash in the business to support future growth.
Tips for Cashflow during Growth:
- Prepare a monthly budget and cash flow forecast that looks at least six - 12 months ahead; ensure this captures any capital expenditure and debt repayment requirements.
- Pay close attention to gross margin and expenses; review and update the cashflow modelling at least monthly and as needed for significant events.
- Manage any potential cashflow difficulties and adjust spending or source funding as required. Seek out internal improvements in inventory, accounts receivable and operations management.
Strong profits and cash flow mean the business is now stable enough to survive most unforeseen circumstances and has more options available. This enables dividend payouts and loan repayments to be made - and provides funds to reinvest in the business.
Ensure diligent financial management is in place and begin to ask questions as to future direction. Recognise that financial success can lead to complacency, threatening the business' long-term health. A stronger financial position may support an appetite for expenditure, or the business may fail to innovate and respond to the forces of change.
Tips for Mature Businesses:
- Closely monitor financial indicators for trends that indicate the business is changing, for example sales, margin and profit.
- Identify future directions, new opportunities and markets and follow through with execution, not just ideas. Also, review financing of the business, to take account of current and future needs.
- Find efficiencies within the business to maximise profit distributions for owners.
A successful business may see a time when sales and profits start to fall gradually or suddenly decline due to competition, changes in a customer's business, economic factors, technology or ageing of the owners / founders. If action is not taken, this performance deterioration can lead to business failure or a significant reduction in value.
The biggest threat at this stage is apathy - failure to notice the warning signs, or to act decisively on them. The key is to be aware of the situation and to respond.
Tips for Surviving Renewal:
- Monitor financial results and investigate adverse trends in sales, margin and profit.
- Adjust financing in response to strategic direction - consider future plans when making long term commitments.
- If the business is losing money or cash flow is a problem, take prompt action to arrest decline and determine a future strategy.
Succession or Exit
A successful business may long outlive its founders and it is important to think about your life beyond the business and your personal long-term goals and needs. Succession planning options and implementation may be via a management team buy-out, family succession, trade sale or going public.
Our capabilities include valuing your business, assisting with exit preparation and carrying out the subsequent transaction, as well as working with our affiliates regarding your wealth creation, estate planning and superannuation strategies to ensure your comfort in retirement.
The PKF Lawler Business Advisory team can assist in all stages of business life. For guidance and strategies, contact on of our experienced specialists.