According to the most recent NAICS Association data, there are roughly 14 ½ million small business with annual sales of less than one million dollars in the United States. They almost all have less than ten employees.
The Chamber of Commerce indicates there are about 400,000 new businesses started each year. Of these, about 20% go under in this first year. The reason most often given was lack of funding followed by poor planning and then bad management.
In my 4 Stage Growth Model outlined in the October 8, 2020 blog, the Development Stage’s criterion was those small companies with revenues of less than one million. The stage is not built around sole proprietors but for those companies desiring to substantially grow their revenues which involves adding employees.
Using this 4 Stage Growth Model framework, this blog will share some thoughts on how to break out of this Development Stage.
These are typical characteristics of small businesses who have recently launched to those who are struggling to break out of this early stage.
Development Stage Characteristics
Cash inflow from revenues are not robust and less than one million.
Managing cash to survive is critical for sustainability. Chasing new customers and constraining expenses are dominant management features.
- Business Focus/Planning
Day to day operations dominate the owner and any workers activities. Planning is generally no greater than a year and very ad hoc.
Owner controls decision making most of the time. Staff is limited often less than ten as revenues will not sustain greater numbers.
Operational sophistication is not strong with processes not well defined.
- Target Market
Unless a strong business idea backed by venture capital or significant angel funding, the customer base is generally local.
- Value Proposition
Owner’s business idea drives offering to customer.
Leadership is not typically a discussion point as distracted by daily business. There are few employees.
Where do you want to take the business?
This is the first question to ask yourself in this Development Stage.
If your answer to this question is you are a sole proprietor and quite comfortable continuing down this path, then no need to read further. You are happy and fulfilling your personal career aspirations.
For the rest, one way to think about this question of where you want to take the business is to ponder your exit plan. That helps establish the long-term vision.
Maybe this is a family business, and you want to pass it along to future generations stronger and better positioned than it is today. That is a viable exit plan because you recognize that if you aren’t growing your dying.
Others want to develop the business through their career to be able to sell it for their retirement funds. My only caution with this vision is you need to build a sellable business.
Some want to take the business as far as it will go with the aspirations it becomes a meaningfully sized business with significant revenue and profitability. The exit plan may be to sell when a certain valuation is achieved, or to continue to be engaged whatever it morphs into becoming.
Then, there are those with great ambitions of building an empire which they want to control to the grave.
Obviously, there are many scenarios. What do you want?
As soon as that exit plan is clearer in your mind, the next question becomes how do I get there?
The answer from most every business advisor is you will need to plan a path.
Take time to plan
If you have recently launched your business, then hopefully you have put together a business plan.
Many people just jump into starting a business without thinking through the essential elements necessary for ongoing success which is why so many go under in their first year as the Chamber of Commerce points out.
Even those who have made it through the first year, often continue to float sideways without any meaningful growth. Many will die before their fifth year.
My experience is these small businesses spend all their time fighting the daily fires trying to survive with little time for planning.
If you are in this position unless you set some meaningful time to plan, then the business will just keep floating sideways.
What are elements of the plan for breaking out?
My reason for developing the 4 Stage Growth Model for small businesses is to give a roadmap of elements to aspire to in the shorter term.
Thus, the objective becomes moving into the Growth Stage.
Here is a generalized description following the same elements outlined in the Development Stage with new characteristics.
Owner(s) are getting excited about the organization’s success. Traction with new customers or expanding activities with current customers is generating a growing revenue base. Typical revenues run above one million and below ten million.
Organization is approaching a going concern where owner is less critical to survival and growth. Revenues are providing cash to invest in business and improve operability and compete more effectively for new business. Loss of key customers can prove devastating.
- Business Focus/Planning
There is a fair amount of activity on generating new ideas for products/services/customers and more sophisticated approaches to attracting customers through marketing. Still planning is heavily oriented towards current year. Planning still may be rather ad hoc lacking strategic focus synchronized with tactical game plans. Planning framework including mission, vision, objectives, value propositions, target markets, strategic themes, competitor analysis, goal cascading, accountability, and so forth are often lacking. Effort does not seem to match current rewards for many with the focus still on the here and now.
Other key players have evolved and perform critical roles. Often, these players interact more, and teamwork is emerging. Organization structure is still somewhat loose with not overly formal role definition. The size of the organization varies based on the nature of the product or service provided. Often staff exceeds ten and but generally does not exceed fifty and almost always less than one hundred. Contractors are used to avoid adding staff in many cases. People can perform multiples functions.
Processes have emerged and there is a level of documentation and sometimes training. Processes are often changing and adapting as more effective functioning progresses and customer feedback requires modifications to be made.
- Target Market
Local market continues to dominate customer base in most cases. Customer loyalty has emerged and identified as key customers with a retention focus. Expenditures for sales and marketing have expanded significantly. Often there are some dedicated people to sales beyond owner and budgets for improved web sites, marketing collateral, and marketing campaigns.
- Value Proposition
Value proposition is adapting to customer needs and customer feedback.
Owner and key players are beginning to think about how to motivate and retain employees. Decision making processes are receiving some scrutiny. Delegation has emerged where owner feels comfortable with key players carrying out more defined roles. Level of participation in decision making varies but generally still well controlled by owner.
Not sure this Growth Stage can be achieved?
If you face the dilemma of breaking out, you may be bewildered on how to move into this Growth Stage.
Here are two recommendations for you to consider if you are willing to listen to others.
First, look for a business advisor.
The association I belong to, The Silver Fox Advisors, specifically targets small businesses.
This is our mission.
“Our association of proven business leaders serves the needs of small business owners, CEOs and entrepreneurs in the Greater Houston area. We help leaders establish, grow, and prosper their business by sharing our collective wisdom through robust service offerings.
The second recommendation is for you to consider their service offerings.
I particularly recommend their CEO Roundtables that are free of charge.
This will provide you an advisory type board of other small business owners and CEOs trying to grow their businesses too.
A Silver Fox Advisor participates in these monthly meetings.
You should also consider our CEO Education series as well as our Lunch & Learn programs.
If this interest you, go to our website Silver Fox Advisors for more details. As we like to say, Growing your business can be challenging. You don’t have to go it alone.
Contributed by Lane Sloan, former Shell CFO and Silver Fox Advisor.