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Business Life Cycle

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.


Business Lifecycle
source: Corporate Finance Institute


  • Phase One: Launch: Each company begins its 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 business matures, sales begin to decrease slowly. 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 companies to reposition themselves in their dynamic industries and 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.[1]


The Purpose of the Business Life Cycle[2]
Although all businesses are inherently unique, they often follow a similar trajectory. In fact, if you plot a business’ journey from conception to present on a timeline, you’ll usually see five distinct phases. It’s similar to how people grow and mature; the business life cycle shows businesses maturing from infancy through adolescence to adulthood and eventually, old age.

According to the Startup Genome Report, 90 percent of small businesses fail. To be clear, almost all businesses start as small businesses before processing through the stages of business growth. And when a business does fail, it doesn’t usually happen right away.

Though it varies by industry, about 20 percent of businesses fail within one year of launch. Of the 80 percent that remains, 30 percent fail within the second year. Then 50 percent of the remaining businesses fail by the fifth year, and between years five and ten, 70 percent of the remaining businesses fail.

Why? It often boils down to poor planning, preparation, and decision making.

The business life cycle may have originated as an analytics tool, but it’s increasingly used as a business blueprint. Since it outlines the trajectory of a business, entrepreneurs can use the business life cycle to build stronger, healthier businesses.


Navigating The Business Lifecycle[3]
Not all businesses will experience every stage of the business lifecycle, and those that do may not necessarily experience them in chronological order. For example, some businesses may see astronomical growth right after startup, and the founders may decide to cash out right away, jumping straight to that “exit” stage.

For many companies, though, there will be some sort of resemblance to the stages defined above, and awareness may help you anticipate what is coming next and how you can best prepare yourself and your team to maximize your chance of success. Making the right decisions at each stage is another thing altogether, however, and that will require your usual mix of gut instinct and practical business sense.


See Also

Business
Business-to-Business (B2B)
Business Application
Business-Driven Development (BDD)
Business-to-Business Gateway
Business-to-Consumer (B2C)
Business Accelerator
Business Activity Monitoring (BAM)
Business Analysis
Business Analytics
Business Application
Business Application Programming Interface (BAPI)
Business Architecture
Business Asset
Business Capability
Business Capability Modeling
Business Ethics
Business Case
Business Centric Methodology (BCM)
Business Continuity Management (BCM)
Business Continuity Plan (BCP)
Business Continuity Planning (BCP)
Business Cycle
Business Diversification
Business Driven Technology
Business Drivers
Business Ecosystem
Business Environment and Internal Control Factors (BEICF)
Business Excellence
Business Expansion
Business Function
Business Function Model
Business IT Alignment
Business Impact Analysis (BIA)
Business Incubator
Business Insurance
Business Integration
Business Intelligence
Business Interruption Insurance
Business Life Cycle
Business Logic
Business Management System (BMS)
Business Model Innovation (BMI)
Business Model for Information Security (BMIS)
Business Motivation Model (BMM)
Business Objects
Business Operations
Business Oriented Architecture (BOA)
Business Mission
Business Vision
Business Model
Business Goals
Business Objective
Corporate Structure
Corporate Social Responsibility (CSR)
Chief Executive Officer (CEO)
IT Strategy (Information Technology Strategy)
IT Governance
Enterprise Architecture
IT Sourcing (Information Technology Sourcing)
IT Operations (Information Technology Operations)


References

  1. Definition - What Does Business Life Cycle Mean? CFI
  2. The Purpose of the Business Life Cycle Nexcess
  3. Navigating The Business Lifecycle Entrepreneur