Small businesses are the backbone of the American economy.Data compiled by the Small Business Administration reveals that approximately 28 million small businesses exist in the US (enterprises with fewer than 500 employees) employing over 50% of the working population (120 million individuals). Further, 550,000 new businesses are started each month generating over 65% of the net new jobs since 1995. Of these new businesses, 7 out of 10 survive at least 2 years; half at least 5 years; a third at least 10 years; and a quarter will stay in business 15 years or more.
Given the importance of small business success to the U.S. economy in general, and to individual entrepreneurs and their workers in particular, it is critical to examine factors thatlead to successful business start-up and growth. These factors fall within the broad categories of people, process, product, and capital acquisition.
UNDERSTANDING BUSINESS MATURITY
In order to determine the type of effort required in each category, the level of investment needed, and the timing of action to be taken, it is helpful to understand where a company falls on the spectrum of business maturity:
Stage 1 – Inception. Obtaining customers, the ability to deliver products/services, and having enough cash to cover start-up expenses are the predominant issues. The business is owner-driven and formal planning and support systems are minimal to non-existent.
Stage 2 – Survival. Generating cash to finance growth and earn an economic return is the predominant issue. The business is owner-driven, however, a sales manager and/or a manufacturing/service manager has been hired. A system in support of cash management has been put in place.
Stage 3 – Growth. Ensuring the basic business stays profitable and developing managers and systems to meet the needs of a growing business are the predominant issues. Functional managers are hired and basic financial, sales, marketing, and production processes and systems are put in place. At this stage, owners and managers actively monitor strategic performance.
Stage 4 – Expansion. Ensuring there is enough cash and borrowing power for rapid growth, and hiring and retaining quality people at all levels to facilitate growth are the predominant issues. Extensive systems in support of critical business processes are put in place. The owner’s ability to delegate responsibility is critical.
Stage 5 – Maturity. Consolidating and controlling financial gains brought on by rapid growth while ensuring fundamental basic beliefs and values are maintained are the predominant issues. At this stage, systems are extensive and well-developed. The owner and the business are separate.
FACTORS INFLUENCING BUSINESS GROWTH
Within the categories of people, process, product, and capital acquisition, a number of factors drive business growth. These include: leadership; culture; problem solving capability; employee engagement; technology; innovation; and threshold for risk. Using the maturity stage definitions as a guide, the impact of the following factors are explored: Ownership Focus; Business Funding; Strategic Direction; Cash Management; Sales and Marketing Effectiveness; Process and System Formalization; and Performance Management.
Ownership Focus –
During the Inception stage, identifying, attracting and selling to customers are the most important activities. Once it is proven that clients will buy a company’s product, priority shifts to the Survival stage, where generating revenue and managing expenses are imperative. As the business moves forward into the Growth and Expansion stages, the owner begins to coordinate infrastructure growth by bringing on board new processes, systems, products, people, and investors.
Given the initial tasks at hand, the challenges facing owners early on include their ability to manage time, adapt to changing conditions, manage stress and overcome self-doubt. As the business grows, challenges include developing trust in others; examining new ways (outside their existing paradigms) to get work done; resetting strategic direction given changing business conditions; and looking for new sources of funding. At the Maturity stage, managing shareholder expectations, overseeing company culture, and succession planning become important ownership responsibilities that are added to the priority mix.
Entrepreneurs face a myriad of challenges in today’s hyper-competitive business world. Fortunately, more resources than ever (coaches, mentors) are available to help business owners overcome the inevitable hurdles that lie ahead.
Business Funding –
Typical sources of business funding include: friends and family; incubators; banks; equity crowdfunding; angel investors; revenue-based financing firms; and venture capitalists. The types of financing these sources offer generally include debt funding, equity funding and revenue-based funding.
Debt funding includes traditional business loans, as well as short-term loans that may be used to finance the cost of an individual item or an entire venture. This type of financing requires scheduled payments, regardless of company performance, that impact cash flow. Companies seeking debt financing tend to be established businesses with hard assets.
In contrast, equity funding is financing provided in exchange for an ownership interest in the company. Capital is repaid to the investor at the time of sale/IPO. Companies seeking equity financing tend to be those with a breakout product in a market of more than $1B or more.
A third common type of financing is revenue-based funding. Revenue-based models are similar to debt financing. However, repayment is based on a percentage of monthly income. If a company grows faster than expected, the loan will be paid off quicker, as monthly income is higher. Equally, if revenue is lower in a particular month, the repayment amount is lower. Also, there are generally no fees or penalties for early repayment. Companies seeking this type of funding tend to be those in the early stages of revenue growth that are seeking small capital infusions to fund sales, marketing and/or product development efforts.
The risks and rewards of seeking outside funding are immense. If a company has too much debt, its access to financing may be constricted, perhaps before the company has a chance to complete its growth strategy. However, if a company has a high amount of debt and revenue suddenly stalls, such as in a recession, it may leave the business unable to fulfill its obligations. If a company continually relies on equity financing, it may find that it loses a certain amount of decision-making authority, a factor that could inhibit growth strategies just as much as a lack of funding. Thus, entrepreneurs need to carefully decide what type of funding is best for them; who they should go to for funding; how much funding they need; and when the funding needed. They may find that they would benefit most from a hybrid model that combines different types and sources.
Strategic Direction –
Strategy is the framework of choices that guide the nature and direction of a business. This includes basic beliefs and values; future product/service and market emphasis; competitive advantage; the identification of infrastructure and skills required for strategic success; and financial and non-financial results.
During the Inception stage, it is imperative that a basic roadmap for success be put in place. This entails clearly articulating the organization’s product/service and market targets; competitive advantage; and financial goals. That said, at the Inception stage, a company’s strategy is to simply “remain alive.”
As the business moves into the Growth stage and beyond, the strategic roadmap grows to include basic beliefs and values; the identification of future product/service and market emphasis; and infrastructure and capability needs.
Successful companies proactively review and update their strategy on a regular basis. Setting company direction is not a onetime event and is absolutely imperative given today’s changing business climate.
Cash Management –
Managing cash is important at each stage of business maturity. That said, most small business failures occur at the Survival stage due to cash flow problems. Funneling cash into the business through enhanced sales activities and expedited account receivable practices, while at the same time managing monthly expenses, is paramount to survival. At a minimum, cash forecasting along with accounts receivable and account payable strategies are required.
As the business grows, cash will be ploughed back into the company to help finance working capital demands and expansion opportunities. Thus, robust cash management processes, systems, and practices overseen by experienced personnel is needed.
Sales and Marketing Effectiveness –
During the Inception and Survival stages, the ability to identify, attract and sell to customers is critical. Based on the high-level strategic roadmap, product/service benefits need to be communicated to targeted markets; prospects identified; leads with the highest buying potential flagged; sales plans developed; and sales calls made – over, and over, and over again! It takes dedication, adaptability, versatility, energy, capability, thick skin, a process approach, and a plan to succeed. All too often, entrepreneurs lack the confidence and/or capability to optimally drive sales. If this is the case, an experienced sales person must be brought on board to drive these critical activities.
As the business moves into the Growth stage and beyond, sales and marketing investment and effort will increase. On the sales front, additional sales people will be hired and trained, and formal processes and systems in support of sales installed. Marketing will take the lead in setting marketing strategies in alignment with overall company strategy; conducting market research to identify market opportunities and customer needs; developing new products to meet new customer requirements; ensuring the overall customer experience needs are met; promoting products and services; and directly supporting sales personnel by providing promotional material.
Process and System Formalization –
Business processes create a consistent, replicable way to get work done. Systems provide information as to how well the overall business and/or the specific processes are performing. At the Inception stage, processes tend to be person-dependent and focused on manufacturing, distribution, and/or finance. Getting products made, getting them out the door, and getting paid in a timely manner are the priorities. The sequence of activities, the timing, and the overall outputs attained may vary during repetition. Systems are rudimentary at best and tend to focus on providing financial information.
As the business grows, critical business processes in all functional areas need to be documented, consistently deployed, automated, measured, and continuously improved. These improvements will positively impact long-term quality, cost, customer satisfaction and employee morale.
Performance Management -
Performance management encompasses all that goes into attracting, retaining, and attaining results from employees. The need for heightened performance management processes, systems, practices, and leadership capability ramps up significantly at the Growth and Expansion stages when new employees are brought into the business.
Traditional performance management models in use today address the need for creating a physical work environment conducive to attaining results; establishing and communicating clear performance expectations; developing employee capability; offering meaningful reward and recognition programs; and providing response-sustaining and behavior-modifying feedback. As a new generation of workers enters the workplace, companies must underpin their performance management models with basic beliefs and values attractive to millennial workers (and soon, the post-millennial generation) along with enhanced technology, employee engagement, and flexibility.
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