By Mike Gardner
For any business, and small business in particular, the business owner’s primary objective is to grow and develop his company. This article, explains the evolutionary steps encountered by small business during this journey and how proper planning facilitates these transitional phases.
First off, what is a small business?
The SBA considers a small business one that employs 500 or less employees. Under this broad-based definition, the Bureau of Labor Statistics determined that small businesses comprised 99.7% of all U.S. employer firms and created 64% of the net new jobs from 1993 to 2011. Annual new business openings accounted for approximately 10 – 12% of the total small businesses with employees which, according to Bis.gov, totaled around 400,000. Typically, only half of new businesses survive 3 to 5 years, and less than one-third remain operational longer than 10 years. Only 80% of new small business ventures survive past their first year.
My father operated a small security guard business in Toledo, OH which had 500 employees. As a young boy, I remember asking him what he did for a living, and he responded that he was the “chief cook and bottle washer.” Strange, I recall thinking; he never washed the dishes at home. Later, my father expanded and clarified his earlier definition by saying that he had to do it all. Some of his duties included hiring and training employees, meeting with prospective new clients and ensuring existing clients were happy, keeping the books, paying the bills, paying employees, filing payroll tax returns, witness duty, government compliance reporting, insurance claim reporting, billing and collecting from clients, and fielding the numerous early morning calls from guards or clients with problems. Chief cook and bottle washer, indeed!
Several models exist that detail small business growth patterns. For the purpose of this article, we will examine the Harvard Business Review published work of Neil C. Churchill and Virginia L. Lewis, “The Five Stages of Small Business Growth.” These stages include:
While transitioning through each phase, the business owner’s role gradually evolves from operator to manager, and her goals shift from short-term reactionary to longer-term proactivity. Examples of typical early phase objectives could be resource-oriented, such as worrying if there are enough customers in the store, supplies on the shelf, employee coverage, and (most importantly) sufficient cash in the bank to get through another day. Advance planning is often-times deemed a luxury that “sounds good in theory” but is not considered practical given the constraints of the 24-hour clock.
Existence In this initial stage of a small business, 1) the product or service is not market-tested, 2) most owners perform the majority of the work, and 3) cash is typically scarce. Increasing customer “head count” through awareness and satisfaction are the core objectives that must be accomplished quickly. Systems and controls are of minimal consideration, and accounting practices consist of preparing deposits, writing checks, and checking bank balances each morning.
Although a business plan may have been a prerequisite for obtaining financing, frequently these plans are shelved shortly after creation and are never revisited. In the existence stage, immediate operational needs, not future planning, are the top priority. Unfortunately, prioritizing these types of immediate, operational needs often results in many small businesses failing or significantly under-performing, in part, due to not following the roadmap to success detailed in their business plan.
Analytix Solutions services can benefit companies in this preliminary stage by assuming the function of financial statement preparation and comparing operational results with projections. Our analysis of planned versus actual variances will provide the business owner with critical insights designed to help his business stay on course.
Survival In the survival stage, the business experiences a small profit along with a somewhat stabilized customer base. Cash flow still remains pivotal due to competitive pricing and additional outflows necessary to accommodate expanded products or services requested by customers.
In the survival stage, awareness shifts towards increasing market share and return on investment (ROI). Gross profit and cost efficiency are reviewed as a means to initially realize these objectives. We can assist the business owner in this stage to develop revised business plans based on predetermined marketing and return objectives. Analytix can also develop weekly “flash” reports that provide timely feedback on business performance within select business plan key performance indicators (KPIs).
Success The implementation of systems resulting in stabilized profitability and streamlined operations occur in the third stage aptly titled success. In this phase, the business owner’s role begins to change from “doer” to “manager”, as delegation plays a larger role within the company. During the success stage, the business owner is faced with the decision to maintain operations at current levels or to pursue a growth-based plan.
Budgeting is still critical in the third stage, even with the company’s demonstrated financial stability. Through the budget planning process, Analytix can assist the business owner establish her short-term (profitability) and long-term (market-share) strategic goals.
Take-Off (Growth) Capital structure and finance play a larger role for a company that reaches the take-off stage. A business owner at this level will pursue either market preservation / expansion or the sale of the company for significant profits. Additional capital may become necessary to invest in equipment and facilities, to properly service a higher customer volume, or to increase the value proposition of products and services just to remain competitive.
Resource Maturity A resource mature company possesses a dominate market share and a loyal customer base. Expansion is achieved through expanding the original business model, market area, or product offerings. Expanded investing in research and development characterize this growth stage.
Analytix can assist the business owner in the last two stages, regardless of the direction pursued. We can perform capital budgeting analysis to help determine the viability of proposed investment projects, as measured by ROI and payback. If the business owner decides instead to sell the business, we will assist in valuing the company to help maximize the owner’s ultimate return on investment. For more information on how we can help your business, please email us at [email protected].
Mike Gardner is a CFO/Controller consultant on the Analytix Solutions team. Mike has over 25 years of accounting experience in CFO and Controller roles across multiple industries, including transportation, warehousing, grocery wholesale and retail, fast food operations, and manufacturing. Watch for future articles from Mike as he shares his insights and experience.