Understanding the stages and financial struggles in business operations

Credit to Author: Shalini Dharna| Date: Wed, 11 Oct 2023 14:06:53 +0000

We already know that comparison is the root of all evil and this can be especially true when it comes to running a business. You may see a business and assume they’re doing well, but the reality is you have no idea how long they have been in business, or more importantly, what their financial struggles are!

As an accountant I work with a lot of entrepreneurs in various stages of business operations. Many of them come to me having talked to peers and will say: “they’re only paying X in taxes” or “why can my friend go on a trip, and I can’t afford to pay myself” or my favorite “if you’re saying I made a profit, where is it?!”

The reality is no two businesses are exactly alike because no two entrepreneurs are going to face the same challenges or make the same business decisions. There are, however, some generalizations we can make about the stages of a business operation stages and the financial struggles faced. By understanding where you are in your business, and what your focus should be on, you can have more meaningful conversations with your finance team.

1. The startup stage. This is admittedly the most difficult stage for entrepreneurs and about 21 per cent of businesses will fail within the first year. Entrepreneurs in this stage struggle with funding and managing all the required cash outflows – capital expenditures, initial inventory or staffing – especially when many outflows are required before inflows can even begin! The focus in this stage needs to be establishing a solid foundation and tracking/monitoring your expenses closely.

2. Scaling/Growth stage: This is probably the most fun stage of business as you’ve now established enough traction that you’re starting to generate cash flow and can pay yourself! The focus in this stage needs to be establishing processes and procedures to help you scale and grow operations efficiently. It’s considering how you are going to:

• manage inventory (buy too much, you have too much cash locked up, buy too little and you may not meet demand)
• hire and train staff and establishing the customer journey especially if they’re used to only working directly with you
• invest/find new capital to meet expansion
• develop marketing/advertising strategies to maintain the growth
• not burn out! Many entrepreneurs burn out during this stage because there’s a lot going on.

3. Maturity/Optimization stage. In this stage you can probably take a moment to step back and reflect. You’ve established a position in the market, more predictable cash flows, and your systems and processes are solid. The focus in this stage tends to be managing competition – how do you keep your market space, controlling costs and maintaining employees to keep everything as efficient as possible. We want to streamline operations, costs and resources!

4. Decline/Cash Crunch stage. A lot of entrepreneurs assume that once they’re out of the start-up stage their money problems will go away. However, financial struggles can happen at any stage. Struggles in this stage typically consist of a cash flow shortage resulting from a decline in profits. This can come from either a loss in market share, or increasing operations costs, or both! The focus in this stage needs to be on finding new sources of cash flow, managing debt payments, managing personnel costs, renegotiating any contracts for better terms and in general trying to free up cash flow to regain some stability.

5. Exit/Succession Planning stage. Do entrepreneurs ever really retire? If you’re like my father, you say you will never retire, but at some point you will have to talk about succession planning. In this stage many entrepreneurs struggle with valuing and selling their business – after all this is your legacy! Working with a business valuer to find properly value the assets/business, finding potential successors and managing all the transition is the focus in this stage.

How entrepreneurs handle each stage is going to very much impact their business operations and, of course, their personal finances. This is why you can never really compare your friend’s success (or lack thereof) to your own. While industry benchmarks are great for helping guide our decisions, working with your finance team (yes. you should have a team!) is going to be key in establishing your own goals and targets, and measuring success!

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