Life Cycle

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The  business  life  cycle is  the  progression of  a  business and its phases over time and is most  commonly  divided  into  five  stages: launch,  growth,  shake-out,  maturity,  and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics. In  this  article, we  will  use  three  financial metrics to explain  describe  the  status  of  each business life cycle phase, including sales, profit, and cash flow.

Phase One: Launch

Each  company  begins  its  operations  starting  operations  as  a  business  and usually by launching  new  products  or  services. During  the launch  phase, sales  are low, but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions.

However, as revenue is low and initial startup costs are high, businesses are prone to incur losses  in  this  phase.  In fact, throughout the entire business life cycle, the profit cycle lags behind  the  sales  cycle  and  creates a time delay between sales growth and profit  growth. This lag  is  important  as  it  relates to the funding life cycle, which is explained in the latter part of this article.

Finally, the cash flow during the launch phase is also  negative but dips even lower than the profit. This is due to the capitalization of initial  startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.

Phase Two: Growth

In the growth phase, companies experience rapid sales  growth. As  sales  increase  rapidly, businesses start seeing profit once they pass the break-even  point. However, as the profit cycle still lags behind the sales cycle, the  profit level  is  not  as high  as  sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow.

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either  approaching  market saturation or the entry of new competitors in  the market. Sales peak  during  the  shake-out phase. Although  sales  continue  to  increase, profit  starts to decrease  in  the shake-out  phase. This  growth  in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.

Phase Four: Maturity

When the market matures, sales begin to slowly decrease. Profit  margins get thinner, while cash flow stays relatively  stagnant. As firms approach  maturity, major  capital  spending is largely behind the business, and  therefore  cash generation is higher than the profit on the income statement.

However, it’s important to note that many businesses  extend their business life cycle during this  phase  by  reinventing themselves  and investing in  new  technologies  and  emerging markets. This  allows  for  companies  to  reposition  themselves in their dynamic industries, and hence refresh their growth in the marketplace.

Phase Five: Decline

In the final  stage of  the  business  life  cycle, sales, profit, and cash flow all decline. During this phase, companies  accept  their failure to extend their business life cycle by adapting to the changing business environment. Firms  lose  their competitive advantage and finally exit the market.

Business Renewal

The  fast-moving  roller-coaster  economy  we  live  in  today  makes  this  task  increasingly difficult.  Just  as  we  handle  one  crisis, another looms  around  the  corner. How  can  we sustain— and even thrive?

The answer is the one you’ve heard before: We must consistently remake who we are, what we offer, and how we deliver our offerings to the world. Put it simply, we must reinvent.

What  you  may  not  have  heard  before  is  this:   Today,  the  frequency  with  which  our reinvention  must  take  place  is  staggering. Essentially, we  must become a new company every  three  years.  In fact,  we  must  reinvent   so  frequently   and  so  radically  that the traditional roles  and  processes inside of an organization cannot keep up. It’s time to make reinvention  into  its  own profession. In fact, we must reinvent so frequently and so radically that  the  traditional  roles and processes inside of an organization cannot keep up. It’s time to make reinvention into its own profession. 
 
Contact Solver Corporate to help your company confidentially explore Business Lifecycle Renewal Solutions.