The Life Cycle of a Business
At the beginning of the life cycle of a business, the start-up phase, the focus of producers, managers (if any), and owners is on survival. How will the business be profitable to succeed in the short term? Often the question is: “What will work?”
The second phase of the life cycle of a business, if the business is to survive, involves sustaining a profitable condition. At this point, a system of turning production into cash revenue is established – a system that did not exist before. The question becomes: “How can we make it work better?”
The third phase of the life cycle of a business involves the transfer of ownership, whole or partial, voluntary or involuntary. Most private business ownership evolves significantly within a five-year time span. The question now is: “What is it worth?”
The life cycle of a business produces a system - an aggregating of procedures - that creates a business that did not previously exist. The business - the system of creating a sustainable cash flow over time - has value and the potential of providing wealth to the owner.
The source of business value is cash flow, and the cash can stay with the business or be paid out of the business. A significant amount of the cash flow of a business is paid out as compensation, but as the business system evolves there will be a need to cultivate and enhance the system – those expenditures are capital payments. After the point of profitability, increasing the capital of the business should increase the value of the business.