Business Life Cycle Definition
Business Life Cycle is a natural way of business progression and shows the gradual and slow and steady different stages through which business progress beginning with the development of a prototype idea to gaining traction, moving from the initial phase of slow growth to high growth. Usually, it is divided into four stages – Introduction Stage, Growth Stage, Maturity Stage and Decline Stage.
Stages of the Business Life Cycle (Graph)
Business Life Cycle comprises of multiple stages as depicted through the graph below and explanation henceforth:
#1 – Introduction Stage
It is marked by the initiation of the business life cycle characterized by the evolution of product testing, understanding the product’s commercial viability. This period involves the nascent stage for business characterized by no revenue visibility and cash outflow. Investors, during this stage, commit a small portion of money normally in the form of Seed funding, and the purpose during this stage is to check the product/service viability and acceptability in the market. The majority of the business fails to go beyond this stage.
#2 – Growth Stage
This stage separates men from boys. Businesses that reach this stage have achieved market acceptability and revenue visibility. Cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. generation accelerates at this stage, along with heavy investments in the business. During the business life cycle, a large amount of investment is also undertaken in the business by various investors and financial institutions. This is a high growth stage of the business and results in phenomenal growth in financial metrics before any competitor arrives, or the business loses its mojo.
#3 – Maturity Stage
This stage is characterized by stable markets for the business, stable revenue generation, a highly acceptable customer base. This is the stage where revenue and profits are at their peak. The business has a streamlined process and a stable source of income for its various investors. Normally businesses spent a lot many years in this stage. The majority of the world’s long-standing FMCG companies fall into this category.
#4 – Decline/Saturation Stage
This stage is characterized by the end of the business cycleBusiness CycleThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate., falling revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions., profits, customer movement, and slow and gradual closure of the business. Not all business reaches this stage, and once a business reaches this stage, it’s the end of the cycle for it. This stage is characterized by customer disinterest and outdate of the product/service of the business.
Features of the Business Life Cycle
- Business Life Cycle is depicted through multiple stages, which can either be one at a time or multiple and majorly every business starting from scratch to reaching heights observe these stages.
- Stages of the trade cycle require businesses to formulate an altogether different strategy. Business at the start stage follows a different policy than a business that is at the maturity stage.
- They are natural and not forced ones. It is a gradual development of a business that is depicted through this cycle.
- Another important feature is its varying period. Some stages last for a few months to a year (For example, Development Stage, during this stage a business tries to develop the idea into a commercially successful venture) while some run for a decade.
- Trade cycles are common across industries; however, its impact varies across companies within the same industry.
- Understanding the stage of the Business Life Cycle helps various stakeholders, especially investors, to fund the business properly.
- It also enables businesses to adopt a different approach based on the stage of the life cycle.
- Various stages have different periods that make business static at times and lead to longer time cycles.
- Some business life cycles result in job losses, falling revenues, and declining stock prices for the business, such as the maturity/saturation stage.
Business Life Cycle is a structural pattern that shows the evolution of a business. It is an important concept that holds its practical value since time immemorial. Management needs to well understand the business cycle to generate positive returns, which are in the best interest of the shareholders at large. The different business cycles will result in varying financial metrics, both Top LineTop LineThe top line is the revenue earned by the business by selling goods or services, reported in the income statement for a defined period. (Revenues) and Bottom line (Net Profit) for the business and, as such, holds equal relevance for various stakeholders such as Financial InstitutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. (who lend to the business), Customers, suppliers and so on.
This has been a guide to the Business Life Cycle and its definition. Here we discuss features and its various stages along with advantages and disadvantages. You may learn more about financing from the following articles –