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Financial options for business life Cycle
Every business has a unique design according by its owners. However, a standard way of analyzing the cycles and phases that the business undergoes is generally accepted. The stages normally are startup, growth, expansion, maturity, decline or demise. This means the business managers must adopt different ways of financing these stages in order to sustain the business while targeting the break-even point. These sources include personal funding, bank loans, grants initially or leasing and profits during the last stages of the business.
Small or big businesses have similar phases that they undergo in their lifecycle. Be it that the business is a big manufacturing company or a small home business, there are stages which include the stage of establishment or startup where the owners have the initial idea put down into actual action. The middle stages are growth, decline and renewal stages where the business would have picked up and is already generating profit to the maximum point until it actualizes itself. Lastly there is the stage of either succession or demise where the business moves on or experiences closure (Fair Fax Country 2010). I am focusing on all five stages of the business in this paper together with the most appropriate sources of finance in the stages.
The establishment or the start up stage
This is the stage where the business plan is drawn and all possible ideas put down in writing. The entrepreneur designs the business in solitude or with help from professionals in coming up with the tangible points. This is the most dangerous or riskiest stage of the business because the decisions made in this stage will be long term and set the foundation for the eventual look for the business. The most common challenge in this stage of startup is the acceptance into the market. This makes the owners make an extra effort to keep the business on board.
The efforts that are to be taken include taking a good promotion strategy and hiring of quality marketers. A good team of human resources who are the casual and other laborers in a business like a manufacturing company are as necessary as the initial management team. This means a strong financial base is necessary to support the remunerations and other expenses at the time when the profits are not forthcoming (Fair Fax Country, 2010).
The financial options in the stages normally include money from the owners and their families, business partners and such close kin. This is because of the less restriction that may be put up by the family members that include deadlines or high interests charged from the amounts. Personal savings from the pockets of the owners is a good star up source for the business. In addition to that the business may get advance funding from suppliers on credit or similar arrangement (McNamara, 2010). This means suppliers can agree to advance their products to the business at minimal pay and hope to get their payments at a later date. Bank loans are slowly gaining popularity in the financial world today because of the reduced requirements set by the banks and reduced collateral for the funding (McNamara, 2010). Loans are easier to obtain from some banks because of the competition that exists between the banks. However the owners must consider the dynamics of the loan from the timing to the interests to all other hidden charges in order not to experience future inconveniences. These sources must be reliable to and effective for a smooth start of the business at this and later stage.
The growth stage
According to Zahorsky (2010), this is the stage where the company has set ground and the product and services have been put in the market for the first time. The customers at this point are on trial and error basis. The products are to be analyzed and faults are initially likely to be identified. There is an experience of recall on part or some of the products from the market to adjust them for the customers. Zahorsky (2010) notes that the quantity of production at this stage is low and experience an increase as time goes by. This stage has the challenge of establishing what the customer wants and not what was initially thought (More Business.com. 2010). This includes research and carrying out studies about the dynamics of the customers.
The financial options taken at this stage should focus on the relevance of the business and the timing that the business is likely to break even. They include loans, grants and credit finance from the interested stakeholders (More Business.com, 2010). Grants are amounts advanced to the business normally from independent sources like the government with minimal expected returns. Credit finance is however given by stakeholders because they are likely to be interested on the future big profits or returns that the business is likely to bring. This stage profits are likely to be coming in, ploughing-back of profits can be another very appropriate sources of finance. This means the realized profits are reinvested back to the business is instead of paying the stake holders.
The growth stage can also be financed by leasing or hiring of property by the owners. This means some assets or property like machinery can be hired to perform various tasks instead of buying the property which may not be required on an advanced stage.
This is the stage where the business has reached the point where the revenue is comfortably above the cost that is incurred. A pattern of returns and expenditures can be analyzed at this point, this means financial statements can be analyzed by the accountants and a particular pattern created (Beaumont, 2003). It is at this stage when the management realizes that the profits generated can be increased if various arrangements are taken into consideration (Johannsen, 2010). This is because customer loyalty is likely to be high and demand grater than the actual supply. More products in the market by the company are needed hence the steps necessary here include expansion and increase of operation activities.
Groot, (2008) observes that expansion entails increase in the staff numbers and hiring of more human resource, acquiring of more machinery and assets and addition of more outlets and supply mechanisms. It also entails finding of more supply of raw materials to produce more and more goods that are needed by the customers. It's normally motivated by the need to satisfy the customer needs and exploit all the necessary sources to maximize the profits.
This stage also involves increase in the customer base geographically through exploring new destinations either regionally or internationally (Marshal, 2000). Lately, technology has boosted the ability of the businesses to expand and reach for more customers through advanced marketing strategies or selling the products online through internet sites.
Expansion stage normally requires a great deal of financial support. It's normally funded by selling of the company shares or capital items in the stock exchange market, joint ventures by like minded business entities, licensing, incorporation of partners and the government intervention through funding. The government may decide to take part in financing if the business offers services of national importance like security and education (Rothwell, 2007).
The greatest challenge in this stage is the moving into new markets as they are unpredictable and may end up with a disastrous move that can se a loss of money of the business (Marshal, 2000). This stage shows that the business has come of age and is at the peak where it can be seen as being mature. The sources of finance are massive and big profits or losses are expected at this stage.
This stage means that the business has passed the most trying part of its life. The business can survive most of the unforeseen circumstances. It normally means that the business has enough of it own capital backing and enough external and internal support systems. According to Baker (2010) the business is likely to have a lifespan of averagely five to ten years and the reputation is likely to have been established. At this juncture, most of the customers are loyal and the products produced are household names (Baker, 2010).
As Groot (2008) Notes, the main focus on these stages is improvement of productivity and operation of all its activities. The business can be able to afford extra efforts of empowering its human resources through seminars and trainings in order to keep the workforce at par with the rest of the business. Maturity stage is when the existing business can easily counter oncoming business competition.
The financing of the business is a bit easier to handle because of the experience and the good reputation of the company. According to Reference for Business (2010) there is an aspect normally companies at this stage tend to ignore, namely corporate social responsibility. At this point the company can be able to fund this projects fro its own profits. The company may also want to take additional projects such renewal of office furniture or a complete overhaul of machinery. The options of the sources of finance at this stage are many but the company must look at the most appropriate one, are the internal sources such as allocations of funds to those projects through budgeting. Profits can also be used at this stage.
Larger projects may require larger amounts of capital such as bonds and other securities that attract large sums of money. However rat this stage some bad decisions on finance can be made resulting into crumpling of the business. This may be through over hiring of staff, increase of assets that may not be useful in undertaking of short term obligations. If this happens there is a chance that liquidity problems can be experienced which make the company may not be able to meet its current activities (Cassidy & Cassidy, 2010). This is the stage where most of thee businesses either carry on successfully or experience 'death' because of circumstances. This leads to the next stage of decline.
This is the stage where profits that were being realized initially are no longer recorded. This may be through some uncontrollable aspects by the business by unforeseen completion, market forces or simply the issue of elastic limit whereby the products can't be adjusted further if they are to be useful (Ellingham & Fawcett, 2006). There is a characteristic cash flow cut from the business and products or services moving at a slow pace. The biggest challenge at this stage is to fund the initial activities that the business was used to in a manner that will maintain its profitability.
The basic way of financing this stage is to cut the costs to make the break even point realizable. This is also to maximize on the little profit that may be realized. In addition to that its advisable for the business not to engage in external financing as it may even complicate issue more. Its advisable to seek new technology in production distribution of the products and services in order to increase the profits.
The decline stage can be reverted if proper consultations and expertise is employed, however if not there is the likelihood of the demise or death of the business whereby the business is wound up or forced to shut down (Groot, 2008). This may be because the business is making more of the losses than the profit that is expected. Its characterized by calling off all the staff members, disposing assets and paying all the stakeholders in a manner which is agreeable by the members or the internationally accepted standards (Reference for Business, 2010).
All the activities at this stage are financed by the remainder of the amounts that is realized after the sale of the assets. This stage can be avoided by change of management and ownerships to new owners.
In summary he aspect of financing of business has many dimensions. First, the size of the business matters a lot because of the activities that are to be undertaken (Ellingham, I. & Fawcett, 2006). Big businesses require larger amount of initial capital to start or set base unlike smaller businesses. Ellingham & Fawcett, (2006) also note that a large manufacturing firm requires income to hire more people and machinery unlike a small grocery firm which requires a little amount. All the stages that the businesses undergo depend from one entity to another and must not be standardized.
The option of financing depends on the stage whereby the business is. For instance if the owners can be able to access business loan at an early stage they can do so for a higher amount. If the owners posses a higher amount of saving initially it may be misadvised if they go for the same loan. In the advanced stages also the financing should take into consideration long term and short-term implications. The early stages of the business cycle require financing that will not require deadlines and pressure like loans and savings while the later ones require more profit oriented and secure sources.