Phases of the Business Life Cycle The Establishment

Phases of the Business Life Cycle The Establishment Phase • When the business is first set up – a very difficult stage. • No buyers or suppliers • Production costs are high due to set up expenses, small scale of production • Costs are high as sales need to be built up with ’costly’ promotion • Sales are low and profits limited – possible negative profit • Need to borrow money but have no creditworthiness to borrow against – may be OK if they have a good business plan • Competitors may react aggressively

The Growth Phase • Characterised by greater customer awareness and improvement in the quality of products • Development of new products • Rapid increase in sales • Cash problems as wages and expenses may need to be paid out before payments are received • High levels of innovation • Informal communication and business structures • Informality creates problems as there is little direction and control • Managers often lack the skills for larger business and they often fail

The Maturity Phase • Sales level off due to new competitors • Focus on improving efficiency so profit margins are maintained as prices fall • Professional managers help give the business a formal structure • People with specialist skills are employed – accounting, employment relations, operations, finance – departments are formed making the business easier to control • Systems and culture are developed

The Post-Maturity Phase • Managers try to revitalise or renew the business • More resources allocated to research and development (R+D) and new products • More efficient ways of making products and delivering higher levels of customer service Renewal Maturity S a l e s Steady State Growth Establishment Cessation Time

Challenges at each phase of the business life cycle The Establishment Phase • Survival • Shortage of money – personal assets often used as security • Retailers often resistant to stocking their products • Difficult to communicate the benefits of the product • The entrepreneur has to be a ‘jack-of-all-trades’ The Growth Phase • Providing the quantity of products required • Demand difficult to forecast so delivery is difficult • Shortage of skilled labour • Staff over-worked • Specialists are needed

The Maturity Phase • Innovation required • Competitors copy your successful products • Competitors fight for your market share Voluntary and Involuntary Cessation • Reach an end for a variety of reasons • owners retire or die • Voluntary cessation occurs with the business in a SOLVENT state • Involuntary occurs when businesses are forced to stop trading because of INSOLVENCY

Involuntary Cessation • Creditors who are owed money want to be treated fairly • Courts are often involved • May result in: • bankruptcy • liquidation • receivership BANKRUPTCY • Serious financial problems • Probably been sued by creditors for no-payment of debts • Unable to pay as ordered by court • Creditors petition the court for bankruptcy so assets can be divided up

Creditors = owed money by a business A Bankrupt = a person who the court declares is unable to pay there debts Liquidation = the process of selling a company’s assets and winding up the company Receivership = where an independent person appointed to fulfil the responsibilities of the directors A Receiver = an independent person who is appointed to receive, control and safeguard property Litigation = means to fight or defend a case in a civil court