Identify Your Current Stage of Profitability to Unlock Your Business’s Full Potential.

Either a business start-up will quickly establish its business model for generating revenue at a profit, or it won’t.  If the owner is good at generating sales at a profit before burning through their initial financing, they will quickly enter the “stretch stage” in the five stages of business profit progression.  If the owner fails to generate sufficient sales to cover its operating costs, it will fall into the “survival stage.”

The business profit progression stages of “stuck, stable, or substantial” come after a start-up survives either the stretch or survival stages.  If the start-up entrepreneurs do everything right, they can quickly move from the stretch into the substantial stage.  Think Facebook, Uber, and Google.  If they don’t, they will either go out of business, remain in the survival stage, or fall into the stuck stage.  Below is a diagram and high-level description of the five stages of business profit progression:

	Survival	Stuck	Stable	Stretch	Substantial
Definition	Doing whatever they can to exist into the next month.	To be fixed tightly in this position.  Likely in a rut working in a situation that never changes.	To be steady at a fixed level.  Very similar to being in a groove of routine and habit.	Ownership is reaching as far as possible, financially and professionally, in a particular direction.	The business is of considerable importance, size, and worth.
Headline	It’s always groundhog day looking for the light at the end of the tunnel that never comes.	Doing what’s always been done because of not knowing any better.	Likes doing what works because it’s easy and comfortable.	Some strategies, structures, and processes are working, but not all.	Predictable and repeatable business results through interlocked strategy, structure, and processes.

In May 1983, the Harvard Business Review published a paper by Neil C. Churchill and Virginia L. Lewis titled “The Five Small Business Stages.”  Their work intended to create a framework to better understand businesses’ nature, characteristics, and ownership requirements as they grew.   They observed that the problems faced and the skills necessary to deal with them change as the company grows.  They concluded that owners must anticipate and manage similar factors as the company moves through each stage.

This recognition led them to identify the five stages of small business development.  Each stage is characterized by an index of size, diversity, and complexity that is described by five management factors:

1. Managerial style,
2. Organizational structure,
3. Extent of formal systems,
4. Major strategic goals,
5. Owner’s involvement in the business.

The Churchill and Lewis five small business stages framework is most often represented as follows:

The small business framework nicely describes how small businesses vary widely in size and capacity for growth. Read their May 1983 HBR article to learn more about how the stages are characterized by independence of action, differing organizational structures, and varied management styles.  Learning the nuances of each stage can help you assess current challenges and anticipate critical requirements at various points in a business’s evolution.

The challenge with this framework favored by many business professors and used by many consultants is that it limits diagnosing problems and matching solutions to the size and age of a business.  Yes, the problems of a 6-month-old, five-person business are rarely addressed by advice based on a 30-year-old, 100-person manufacturing company.

While several factors will change in importance as a business grows and develops, what’s more, likely to happen is that most businesses will not pass from the existence stage to the resource maturity stage over their life.  They are more likely to remain in one or two stages as their business ages than move through each stage.

What’s important is the evolution of their profitability, not their age or complexity.  What matters is their cash flow, sales, and profit management regardless of the business’s age, size, or complexity.  This recognition is what led to the following business profit progression model:

Ultimately, every business will either become stuck or stable if they haven’t successfully stretched themselves into becoming a substantial business as identified below:

As shown above, a business will achieve the substantial stage, remain stable, become stuck, or go out of business.  The stretch and survival stages are not sustainable over long periods.  In contrast, a business can be stuck, stable, or substantial for years at a predictable level of sales, cash flow, and profitability based on how it performs through the business profitability model.

How you manage your business profit model dictates what profit stage your business is in.

A business profit model defines how a business generates sales at a profit to improve cash reserves continuously.  Put another way, failing to generate sufficient sales to cover business operating costs means you don’t have a profit model.

Your P&L Statement itemizes the revenues and expenses that flow through your profit model, leading to either a profit or loss. Your Profit Model shows you how you intend to make money, your Profit Plan establishes what you should make, and your P&L Statement shows you what you did make.

A positive difference between actual P&L Statement results and your Profit Plan indicates that you made more money than planned. Even if you showed a profit, a negative difference confirms that you aren’t working your profit model as you should, as confirmed by your business, and that you are making less than you planned. Click here to learn more about the importance of a business model to making money in your business.

Your business profit stage is shaped by how much degree of light you make your decisions by.

Understanding the meaning of light and darkness is essential to better appreciating how the business profitability model results in one of the five stages of business profit progression.   Light is the natural agent that stimulates sight and makes things visible, whereas darkness is the partial or total absence of light.

Darkness is the absence of light, which equates to the absence of information, the absence of understanding, and the absence of confident actions.  When light is present through accurate and timely business reporting, darkness disappears.  What needs to be done to improve gross profit, operating, and net income becomes clear.  To better appreciate the differences between the five stages of business profitability, consider the degree of light versus darkness in working with business reporting that make informed business decisions possible:

Survival	Stuck	Stable	Stretch	Substantial
Darkness	Star	Stars	Moon	Sun
No light	Little light, mostly dark	Some light, mostly dark	More light than darkness	All light, No darkness

Big businesses become substantial because they are very good at converting their data into actionable information.  They do this to minimize their risk of loss as they put large amounts of money at risk in their business to earn higher sales and profits.  Businesses that find themselves in survival mode are just the opposite.  They never look at the financial statements because they are too business fighting the fire of the day or trying to chase down cash to make payroll to bother with lighting their path forward with actionable information.

Below is a side-by-side comparison of the five stages of business profit comparison by five critical areas of business.  Use these comparisons to help you assess your profit progression stage and what it looks like to move into the higher stage of profit performance. As a business moves from one stage to another, additional factors of importance emerge as the business increases in sales, profits, and the cash flowing through its operations increases.

The first area to consider across the five business profit stages is owner involvement, their approach to asset management, and what holds the business back:

	Survival	Stuck	Stable	Stretch	Substantial
Owners Involvement	Total dependence on the owner’s talents; Stretched thin being involved in everything.	Spends some time managing giving direction yet is too involved in resolving problems.	Time spent in the business is predictable because those working in it know what to do when.	Less involved in the day-to-day yet highly involved as the visionary leader pushing people to expand the business.	More of a goodwill ambassador that works through a professional leadership team.
Management Approach	The owner makes all decisions then issues orders.	Owner delegates some independence to their most trusted employee.	Owner delegates supervision to a small number of long-term employees.	Operational decisions delegated as the owner relinquishes daily duties to the management team.	The executive committee sets strategic direction and operating policies through management by objectives.
Held Back	The owner’s lack of management skills is complicated by never being clear or confident about what to do when.	Inability to let go. Not willing to trust others to complete a task or let them learn from mistakes.	Likes how things are and isn’t looking for things to change.	Inability to control actions.  Not good at holding people accountable for results.	Risk of bureaucracy stifling creativity and customer responsiveness.

The more an owner is in doing mode because they don’t trust others to do what needs to be done, the more likely they will bounce between the survival and stuck stages.  The better an owner’s operational abilities are in doing the work of marketing, selling, producing, managing distribution, and cash, the more likely they are to remain stable because the business is as big as the owner wants it to be.  If they have energy, a desire to grow their business, and a tolerance for the risk, they are likely to push themselves into the stretch stage to own a substantial business

The ability to move out of the stretch stage is proportionate to an owner’s energy levels, managerial ability, and willingness to delegate responsibility and to manage the activities of others.  As they grow as a manager of others, they are likely to develop strategic abilities for looking beyond the present.  They enjoy matching the company’s strengths and weaknesses with their larger business goals.  Owners with this ability are the catalysts that take their business to the substantial stage.

The second area to consider is the financial resources, including cash, borrowing power, and sales growth of the business:

	Survival	Stuck	Stable	Stretch	Substantial
Cash Position	“Rolling the Dice” every week that cash inflows will be higher than cash outflows.	Cash is tight more than it isn’t.  They have more good cash inflow weeks than outflow yet little cash reserve to draw from.	They generate enough cash inflows with a dependable cash reserve to cover their outflows without worry.	Cash flow is tight as management invests in business expansion opportunities.	Predictable cash flow from operations; Surplus cash being invested into new business opportunities and “Other Income.”
Business Funding	Owners’ credit cards and what they have borrowed from family.	Uneven cash flow from operations with and equipment leases and trade payables.	Predictable cash flow from operations with very little debt.	Operating cash flow, line of credit, and some business loans.	Operating cash flow, equity investments, lines of credit, and business loans.
Sales Growth	Owner is too busy dealing with customer problems; they don’t seek out new customers.	It is more by luck than any consistent approach to finding new customers.	It is highly reliant on a steady base of customers who have bought for years.	It is achieved through the coordination of an accountable management team.	It is achieved through collaboration across an accountable leadership team.

The first key to funding the business into the higher profit progression stages is generating cash flow from operations. The ability to progress from the stretch to the substantial stage depends on access to business funding, which is shaped by your sales growth projections.

Two realities make this point clear.  First, you know you have become a substantial business when the bankers come to you.  In the stretch stage, you are still going to them, whereas in the stuck and survival stage, you are lucky to get them to talk to you.  The second is that banks and investors are more likely to extend you capital after you prove to them you don’t need it.  The more you need it, the more cautious they will be in extending you financing or investing in your business.

The third area shaping a business’s progression through the five stages of profitability involves relating to numbers, depth, and quality of people, particularly at the management and staff levels:

	Survival	Stuck	Stable	Stretch	Substantial
P&L Statement	Never used because no one knows what to look at.	Looks at once a year when taxes are filed.	Looks at monthly to see how much net income was reported.	Uses to compare actual results to planned to identify where corrective action is needed.	Rolls up multiple P&L Statements into a consolidated view to make investment decisions.
Balance Sheet	A/P is greater than A/R, with more months reporting a negative than a positive cash balance.	Owners’ equity is a fraction of liabilities with very little current assets and inaccurate accumulated depreciation.	Owners’ equity erodes as the owner takes more draws with very little debt and high accumulated depreciation.	Liabilities are greater than equity in pursuit of more assets to fund business growth goals.	BCG growth share matrix is used to divert cash from cash cows to stars while closing down dogs and resolving SBU questions.
Scorecard	No leading nor lagging metrics and measures are used.	The owner is more interested in gauging business viability through daily bank statement checking than using metrics to manage the business.	Owner has a feel for when the business is going well and when it’s not.	The management scorecard process exists for KPI’s and the use of variance reporting to ensure planned actions are producing desired results.	SMART management objectives drive the performance management process backed up with short and long-term incentive programs.
Employees	Two to ten employees of average competence.	Five to fifteen employees with an operations lead and office help.	Ten to thirty employees with a salesperson, operations manager, and accounting clerk.	Twenty plus employees with professional staff in finance, operations, and sales.	Hundreds to thousands of employees hired to tightly defined job descriptions.
Organizational Structure	No structure with people only doing whatever they get told to do.	The owner does most everything of any importance to the business.	Centralized management directed by the owner to a select few employees.	Decentralized through individual managers by business function.	Distinct divisions with highly paid C-Suite, Sales, Ops, HR, and Finance executives.

Nothing in business happens without money and people.  Those businesses in the survival or stuck stages never have enough money to hire the talent they need to progress to the higher stages.  Those who make it to the substantial stage from the stretch stage did so because they hired the right people to significantly impact their P&L Statement and Balance Sheet results.   Those who attempt to stretch into the substantial stage most often fail because they can’t attract, hire, and retain the people needed to achieve the economies of scale enjoyed by substantial businesses.

The fourth area involves strategic focus and systems resources in terms of the degree of sophistication of both information planning and control:

	Survival	Stuck	Stable	Stretch	Substantial
Strategic Focus	Get cash to remain alive another day.	Work fewer hours for more money.	More of the same because what’s being done is good enough.	A profit plan exists for the business to spell out sales, operations, and finance goals.	Continuously improving through a multi-year strategic plan by strategic business unit with results management through variance reporting.
Systems	QuickBooks Online is used primarily to prepare invoices.	QuickBooks Online is used to create invoices and process checks.	QuickBooks Premier and some homegrown processes for tracking production orders.	Continuously evolving financial, marketing, and production systems are in place.	Sophisticated information management and control systems in place to monitor performance.
Process Discipline	Makes it up along the way.	Some procedures are beginning to be defined for sales and operations.	Core processes and unwritten procedures from how it’s always been done exist by sales, operations, and finance.	Formal policy and procedure manuals by function exist and are updated as the business evolves.	Professional management in place executing  strategy, structure, and process under a highly formal review and approval process.

Substantial businesses achieve considerable size and worth because of their culture shaped by their strategy, systems, and processes.  As they worked through the stretch stage, they defined and reinforced what is acceptable or unacceptable, important or unimportant, right or wrong, workable or unworkable through structure, systems, and processes.  They have management controls that define the following:

• • Strategy that identifies company direction, including mile markers (metrics) to know when you arrive.
  • Structure and systems that organize assets (people + equipment) to execute the strategy.
  • Processes with a defined series of actions or steps taken to achieve a particular result.

Those businesses that fail to do this never reach the substantial stage.

The fifth area shaping a business’s progression through the five stages of profitability involves business resources applied to the acquiring and serving customers, product manufacturing, pricing, and distribution capabilities required to generate sales:

	Survival	Stuck	Stable	Stretch	Substantial
Customers	Taking business from whoever and wherever they can get it.	Attracting and retaining customers is always a problem.	Has a small, steady base of repeat customers coming through one channel.	Has a large steady base of repeat customers growing through two channels.	Multiple streams of new and repeat customers are coming through three or more channels.
Product	Inconsistently delivers products and services due to the high dependence on the owner.	Has a small base of products and services that they struggle delivering when sales are up.	Has a small base of products and services that they have been providing for several years.	Introducing existing products into new markets and new products into existing markets to achieve higher sales.	Products and services are offered through strategic business units set up to capitalize on targeted markets.
Pricing	Not sure what direct costs are and are quick to reduce their price to get the order.	Direct costs are factored into their pricing, but not enough to pay for overhead.	Direct and overhead costs have been factored into their pricing.	Pricing and costs are always in flux through the rapid growth and expansion of the business.	Disciplined to make a planned profit because of their sophisticated cost management system.
Promotion	Not done because the owner doesn’t have the time nor what to do.	Have a website yet are highly reliant on word of mouth.	Not done because the owner is content with their sales volume.	Either has a growing sales force with a web presence or a sophisticated website with an inside sales force.	Heavily invested in a sales organization, their online presence with a customer service people skilled in cross-selling.
Distribution	The owner handles most shipping through either UPS, FedEx, or their vehicle.	Too many personal deliveries because they are late in completing an order.	Serve a small geographic area or a tiny online market niche.	Either has a national online presence or a growing regional hub and spoke setup that puts them where their customers are.	Substantial investment in making products and services available where and when customers expect to purchase them.

The key to success across the business elements represented in this fifth area impacting the profit progression for every business lies in the outside elements of the following model:

 

A business with high customer loyalty, employee engagement, and quick operating cycle time will likely have healthy cash flow from operations and higher-than-average profits.  Those who do are stable, substantial, or well on their way through the stretch stage.  The profit stage for these businesses is 100% dependent on the desire of the owner to scale up their business.  Most successful small to medium businesses remain in the stable stage because their owners aren’t looking to get bigger.  They make an excellent return because they know their strategy, structure, and processes better than substantial businesses that use scale and diversity of labor to achieve similar rates of return.

The businesses that find themselves stuck in a rut or fighting through the survival stage put themselves in this position because they aren’t good at managing their business cash flow and profit equations.  They end too many weeks and months with negative results because their investments in direct and indirect costs fail to produce sufficient sales to cover their mismanaged expenses.

Below is the likely reality from an ownership and management perspective for each of the five stages of the business profit progression framework:

Survival	Stuck	Stable	Stretch	Substantial
The owner fails to gain sufficient customer acceptance and operational excellence to be consistently profitable with predictable cash flow to climb out of the financial hole they put themselves in.	The owner struggles with getting work done through other people.  Their inability to let go of doing by delegating is what keeps the business in this stage.	The owner is comfortable doing what they do and isn’t looking for more headaches or hassles. They like the status quo and those who work for and buy from them.	The owner struggles to have enough operating cash and borrowing power, even though they are willing to risk everything to pursue the rapid growth required to become substantial.	The company is likely making much less money than they should because of a big bureaucracy that constricts autonomy and decision making.  Their risk is product obsolescence – think Kodak, Motorola, and Blockbusters.

No one wants to own a business that is in survival or stuck in a rut stage.  If this is you and you want better than act on each of the three key areas of action, you can start today to position your business to progress your desired business profitability stage:

1. Practice effective cash management and gross profit maximization through personal follow-through on commitments and improved communications that help your employees understand the “score of your game” by the job, product, profit center, and month.
2. Establish the company’s financial goals, objectives, and operating budgets to maximize business profitability, then manage your profit plan to ensure resources are suitably allocated to realize company goals and objectives.
3. Continuously evaluate business performance by analyzing metrics and variances to determine progress in attaining company objectives, then make the necessary change in actions through a strong sense of shared personal accountability for the results being produced.

Take the test to learn what business profit stage your business is in?

If you want confirmation as to what business profitability stage your business is in click here to take our no-obligation business profit stages test to learn which of the following best represents your business stage today:

Upon completing the business profit stage test, you will receive a profit stage profile showing you the stage your business is in and likely to be in the next three years.