Categorizing the problems and growth patterns of small businesses in a systematic way that is useful to entrepreneurs seems at first glance a hopeless task. Small businesses vary widely in size and capacity for growth. They are characterized by independence of action, differing organizational structures, and varied management styles.

Yet on closer scrutiny, it becomes apparent that they experience common problems arising at similar stages in their development. These points of similarity can be organized into a framework that increases our understanding of the nature, characteristics, and problems of businesses ranging from a corner dry cleaning establishment with two or three minimum-wage employees to a $20-million-a-year computer software company experiencing a 40% annual rate of growth.

For owners and managers of small businesses, such an understanding can aid in assessing current challenges; for example, the need to upgrade an existing computer system or to hire and train second-level managers to maintain planned growth.

It can help in anticipating the key requirements at various points—e.g., the inordinate time commitment for owners during the start-up period and the need for delegation and changes in their managerial roles when companies become larger and more complex.

The framework also provides a basis for evaluating the impact of present and proposed governmental regulations and policies on one’s business. A case in point is the exclusion of dividends from double taxation, which could be of great help to a profitable, mature, and stable business like a funeral home but of no help at all to a new, rapidly growing, high-technology enterprise.

Finally, the framework aids accountants and consultants in diagnosing problems and matching solutions to smaller enterprises. The problems of a 6-month-old, 20-person business are rarely addressed by advice based on a 30-year-old, 100-person manufacturing company. For the former, cash-flow planning is paramount; for the latter, strategic planning and budgeting to achieve coordination and operating control are most important.

Various researchers over the years have developed models for examining businesses (see Exhibit 1). Each uses business size as one dimension and company maturity or the stage of growthas a second dimension. While useful in many respects, these frameworks are inappropriate for small businesses on at least three counts.

First, they assume that a company must grow and pass through all stages of development or die in the attempt. Second, the models fail to capture the important early stages in a company’s origin and growth. Third, these frameworks characterize company size largely in terms of annual sales (although some mention number of employees) and ignore other factors such as value added, number of locations, complexity of product line, and rate of change in products or production technology.

To develop a framework relevant to small and growing businesses, we used a combination of experience, a search of the literature, and empirical research. The framework that evolved from this effort delineates the five stages of development shown in 

Exhibit 2.

Each stage is characterized by an index of size, diversity, and complexity and described by five management factors: managerial style, organizational structure, extent of formal systems, major strategic goals, and the owner’s involvement in the business. We depict each stage in Exhibit 3 and describe each narratively in this article. 

In this stage the main problems of the business are obtaining customers and delivering the product or service contracted for. Among the key questions are the following:

• Do we have enough money to cover the considerable cash demands of this start-up phase?

The organization is a simple one—the owner does everything and directly supervises subordinates, who should be of at least average competence. Systems and formal planning are minimal to nonexistent. The company’s strategy is simply to remain alive. The owner is the business, performs all the important tasks, and is the major supplier of energy, direction, and, with relatives and friends, capital.

Companies in the Existence Stage range from newly started restaurants and retail stores to high-technology manufacturers that have yet to stabilize either production or product quality. Many such companies never gain sufficient customer acceptance or product capability to become viable. In these cases, the owners close the business when the start-up capital runs out and, if they’re lucky, sell the business for its asset value. (See endpoint 1 on Exhibit 4). In some cases, the owners cannot accept the demands the business places on their time, finances, and energy, and they quit. Those companies that remain in business become Stage II enterprises.