Your small business, like your washing machine, runs through a series of identifiable cycles. Just as it helps to know when to add detergent, when to take out delicate items, and when to call in a repair person, it helps to be able to identify your current business cycle. As renowned entrepreneurship professor Irv Grousbeck of the Stanford Graduate School of Business emphasizes: "Lifecycle planning is fundamental–you simply can’t NOT do it. All our work with small companies has shown that knowing where you are is the only way to get where you are going."

Grousbeck also points out that lifecycle planning is not just a strategic issue. "Each cycle you experience will have implications for all areas of your business–affecting everything from human resources policies to marketing plans and financing decisions."

Here is a quick guide to recognizing business cycles, with hints on what to avoid and how to survive in each of them.

The pre-startup stage provides time to test your idea by conducting research, writing a business plan, and talking to colleagues and potential customers. Ideally, you haven’t quit your day job yet, or have the luxury of a spouse or partner who is still bringing home a paycheck. Your new company has no revenues, or very few, and should therefore have minimal expenses.

What to avoid:

- Don’t take on any fixed overhead or inventory yet. You should be able to back out of your startup with little downside if it doesn’t prove viable.

- Don’t assume your idea will succeed because friends and family members express enthusiasm. Become an information sponge, investigating all the potential problems that could be incurred. Actively engage detractors in debate and see how easily you can persuade them of the merits of your project, or how easily they can dissuade you. As Grousbeck notes: "The most solid, least risky new ventures are those that are market driven–that are responding to an identified market need."

- Don’t neglect your personal finances. "Make sure you’re covered with adequate life, health and disability insurance," urges Russell Fletcher, a San Francisco-based agent with The Equitable Life Assurance Society of the United States. "Also do not neglect retirement planning and education savings for children."

How to survive:

- Keep your financing options close to home by tapping into your savings, obtaining a home equity loan, or borrowing from friends or family. Credit cards with low interest are an inexpensive option if you are disciplined enough to pay back the money borrowed as if it were a bank loan.

- Begin to think "profit" and "cash flow," even at this early stage. Where will it come from? How soon? How much?

- Write a business plan, and write it yourself. Properly constructed and regularly revised, it can be an important tool in developing your operation and guiding day-to-day actions and decisions. (See "Developing a Business Plan: Your Roadmap to Success" in Volume IX of Small Business Success.)

- Get all your paperwork in order. Your business license, reseller’s permit, insurance, business bank accounts and bookkeeping systems should all be in place before you ring up your first sale.

Congratulations! Your homework is done, you have enough cash to tide you over for at least two years’ worth of living expenses (as it may be that long before you can take a salary out of the business), and it’s time to start selling. The goal in this stage is to get to a break-even point where monthly cash flow covers fixed costs. Be careful, however, as many entrepreneurs discover that this stage involves more time (and money) than they ever envisioned. Consequently, this is the stage when most startups go under. Don’t let it happen to you.

What to avoid:

- Don’t get overwhelmed. Bring in help if you need it–family members, college students, outside consultants, SBDCs and SBA resources can provide the boost to help get that first big order out, design a persuasive direct mail piece, or find a little more cash to keep going. Take advantage of them.

- Don’t let your professionalism slip. The hard work entailed in being a successful entrepreneur has just begun. Remember to follow up on commitments, consistently thank your customers and suppliers, and keep thinking about new products and organizational innovations.

- Don’t let receivables pile up. As cash flow is crucial in this stage, you can’t afford to let payments from customers remain outstanding. Be firm, polite and persistent in collecting what you are owed.

How to survive:

- Find enough money to carry you to the break-even point. If personal savings and supportive friends and family are tapped out, explore loan options. A bank where you are an established customer is a good place to start. Be creative–it will be easier to secure a personal or home equity loan than a business loan during this early cycle. Credit unions and savings and loan institutions may also be receptive. If financial needs are minimal, try the SBA MicroLoan program.

- Be a demanding boss. You need to manage time rigorously to meet goals and deadlines. Set firm hours for your workday, create a task list every morning, and keep measuring your progress against your business plan.

- Remember to pay yourself. Even if you can’t draw a huge salary, be sure to honor your personal goals by allocating adequate contributions to a retirement plan.

Having reached a break-even point in your operation, it’s time to begin thinking about growth. The incremental cash the business generates each month can be plowed back into new product development, increased manufacturing capacity, additional marketing and advertising resources, or new distribution channels. In this exciting business cycle, you have the luxury to ask, "What form will this growth take, and how will I pay for it?"

What to avoid:

- Don’t be mesmerized by sales growth. The important numbers to watch are growth in profits (absolute and as a percentage of sales), and return on assets. Learn how to calculate these crucial benchmarks and subsequently determine what drives them in your particular company. This may help guide you in deciding among various growth and expansion opportunities.

- Don’t forget to delegate. Growth requires your attention as the owner, which means that overseeing the day-to-day aspects of the company may need to be turned over to someone else. And while this can feel like a loss of control, or a waste of precious cash, you won’t be able to run your firm as a one-person show indefinitely–if you want it to expand. Try to manage by exception, getting involved in minor details of the business only when necessary.

- Don’t overlook the competition. They may not have paid much attention when you were just getting started, but now that you are ready to spread your wings competitors could become threatened or intimidated. Stay alert to particularly aggressive marketing moves such as price slashing.

How to survive:

- Growth requires significant capital. At this stage, you have two major options: more debt or equity. If your company’s track record and growth potential are both favorable, a commercial bank should be willing to provide an expansion loan. (See sidebar entitled "The Five Crucial Loan Criteria.") Equity is more difficult–angel funding and venture capital are rare, so you may need to look for an active partner who is willing to buy a partial stake in your firm. If you go this route, be sure to find a partner who brings complementary skills and interests to the table. Also, hire a lawyer to develop a partnership agreement with which both parties are comfortable.

- Be aware of your own tolerance for risk and your personal vision for the company; this may be the last time you have immediate and direct control over its direction. Have you considered all the ramifications entailed in growth? Are you willing to assume the risk (in the form of leverage) needed to get there? The answers to these questions should help drive your future plans.

This is the stage in which most successful companies spend the majority of their time. Sales and profits are growing by a small amount each year; staffing levels, fixed assets and product lines are likewise relatively stable. As the sole proprietor or majority shareholder, you are able to take home a comfortable salary. Key questions during this business cycle include, "How long do I want the company to look like this?" and "What next?"

What to avoid:

- Don’t forget to do succession and/or retirement planning. You may want to develop an exit strategy for yourself and your company. Do you want the firm to retire with you? Is it time to sell to a hungry competitor, or to your own employees? Keep alert and open to these opportunities. At the same time, recognize that you and your business may be going through very different stages of life. Perhaps you’re ready to retire when the firm is poised for a major growth spurt, or the company has reached a plateau just as you are seeking a new challenge.

Don’t ignore your return on assets. These are (primarily) your assets generating income for you and your family. As growth slows, could you be getting a better return somewhere else?

- Don’t let inertia take over. While this stage is comfortable in certain ways, it can also be a boring place for an aggressive entrepreneur to remain for five, 10 or more years.

How to survive:

- Comfort stage companies don’t need major financing to stay where they are. However, if you plan to sell soon, remember that a buyer will pay more for a growing company than for a stagnant one. Think about the amount of capital that would be required to move the firm back into a growth cycle. Use financing at this stage as a transition strategy–for example, by selling 30 percent of the company to a passive partner who may want to become more active at a later date.

- Keep current on major trends in your industry. Don’t let products or services become obsolete. Maintain your customer base with active support and involvement. In short, take care of maintaining this company that you’ve worked so hard to build.

This stage is one that no small business owner ever wants to experience. You are officially in a turnaround mode if you have had negative profitability for more than two years (after having reached break-even.) Whatever drives these losses, they are often accompanied by erosion of market share and low employee morale. Compounding this negative situation is the harsh reality that, while the problems you face may be correctable with an infusion of capital, money is tight, and hard to get with your current financials.

What to avoid:

- Don’t confuse internal problems with external ones. You may be suffering from a price war, an economic recession, regulatory change, or merely the tail end of an industry life cycle. You have little influence over these factors, which are a major component of business risk. At the same time, look inside for poor cash management and record keeping, unqualified or unmotivated personnel, or excessively rapid growth.

- Don’t give up. Look for incremental solutions such as a new line of credit to tide you over, a management overhaul, or partial liquidation of assets. Talk to creditors and bankers about your current situation, and ask how they can be part of the solution. If you have proven a good customer in the past, they will want to help keep you solvent.

How to survive:

- Look to yourself for financing. You may be the only person willing to lend money to support the business at this point. Borrowing from your personal assets or investing more equity in the company forces you to assess the creditworthiness of the venture–and to work hard to preserve the capital that is at risk.

- Become as lean as possible. This is not a time for extravagant perks and redundant staffing. As painful as this can be, cut the people and products that are not directly contributing to profitability. Do this swiftly and decisively–it will be easier on the company in the long run.

- Learn from your mistakes. The silver lining of a cloudy turnaround situation is the opportunity to examine, line item by line item, the inner workings of your business. Critically assess how you got into this mess, how best to get out of it, and how to avoid a similar situation again.

Aggravated for years by burnt crusts that brought imperfection to her pies, baking enthusiast Nancy Beaule set out to solve the problem. She knew from experience that the cookbook suggestion of cutting aluminum strips and crimping them around the edge of the pie wasn’t the answer: they inevitably fell off either before or after pies entered the oven. Other products touted as effective in catalogs proved ineffectual as well.

One day while baking cupcakes the solution dawned on her. "I flipped the cupcake over and pictured this product–a cupcake holder upside down with the pleated edge made out of foil. The light bulb went on."

Beaule, who once owned a printing business and was currently doing word processing for an accounting firm, then set out to bring her concept to fruition. "My idea was to fill a void," explains the proud owner of BetaBake Products in Lewiston, Maine. "While stores had long carried metal-type rings for pies–which are made of metal and only fit one size–the Pie Saver I invented can be bent and cut to cover any size pie–whether larger or smaller than the standard nine to 10-inch pie. The other products aren’t nearly as flexible."

Beaule spent one year developing her creation–from molding and refining the prototype (with the help of her engineering student son, Jeff, who did the initial calculations), to creating a logo for the budding company (utilizing the drawing talents of a friend of Beaule’s teenage daughter), to completing patent forms. "A lot of trial and error were involved," she admits. "And we were operating under the constraints of a real shoestring budget."

While patent approval was pending, Beaule sent a marketing kit to Hannaford Brothers. Within three days the company called her back and offered to test-market the Pie Saver in two of its Shop-and-Save supermarkets in southern Maine. From October through December 1996, without any advertising, 350 packages were sold–each costing $3 and containing three reusable foil rings.

"It’s a nice product, and from a Maine company, so it was a good fit for our business," according to Brian Carroll, non-foods reorder buyer for Hannaford Brothers. Beaule, in turn, is quick to thank the chain owners for giving her creation a chance. "A lot of places don’t want to test the waters. They stuck their necks out," she says.

And it’s been growth ever since, thanks to the Pie Saver’s saleability and the hard work and determination of its creator.

The versatile product is now retailing in dozens of Shop-and-Saves from Maine to the Carolinas, as well as several IGA stores and supermarkets in New Hampshire. In addition, a six-minute appearance by Beaule on television channel QVC was broadcast to 60 million homes–a welcome source of advertising.

Thanks to financial assistance from the Lewiston-Auburn Economic Growth Council and the Wiscasset, Maine-based Coastal Enterprises Inc., Beaule was able to move the business from her basement to 1,000 square feet of leased space. There she makes Pie Savers with one part-time employee and her daughter Michlene, who helps out after school.

Beaule doesn’t believe her company has come close to reaching peak size. Three recent developments contribute to this enthusiasm. First, the product is now featured in a wholesale kitchen supply catalog that is distributed to specialty stores nationwide. Second, Pie Saver will be offered to all Kroger supermarkets for the fall 1998 season. And third, a Cincinnati-based manufacturer that sells to supermarkets and mass merchandisers such as Kmart has agreed to take over all manufacturing and distribution aspects. "Things are happening! I think Pie Saver will eventually become a common product throughout the world," predicts Beaule.

And she doesn’t plan to stop there. "I have an idea for another invention," she admits. "But all I’ll divulge at this point is that it’s food related."

Beaule closes with this advice for would-be inventors: "Be sure to test market your product–before investing too much money–to ensure it has saleability and can be produced at a price the market will bear and also prove profitable."

"You won’t believe the difference this will make," claims Elliott Zalta as he heartily pats a departing customer on the back after agreeing on work to be done. "You’ll be so happy." These encouraging words, spoken with the enthusiasm of a renowned plastic surgeon about to perform a facial miracle, are highly unusual in an industry where clients normally get no closer to the person performing the job than the cashier at the front desk.

Yet Elliott Zalta, owner of Elliott’s Automotive in San Rafael, California, is an unusual man–imbuing every task, however minor, with professionalism and a sense of personal involvement. And his 12 years in business and a fanatically loyal and steady customer base speak to the fact that he has carved out a very stable entrepreneurial niche as a result.

"My mother once said she was not surprised at the direction my career took," recalls Zalta. "Apparently I was always very inquisitive and, as early as three or four years old, started taking things like toasters and clocks apart to check them out. They didn’t always get put back together," he admits.

Parlaying his manual dexterity into a hobby, Zalta later began fixing up cars in his spare time, while buying and selling gourmet seafood three days a week until that pursuit lost its sense of challenge. A friend suggested that he devote himself to autos exclusively and, remembers Zalta, "something clicked, and I began to create a path for myself." In so doing, however, he never considered working for someone else–"I wanted to be my own boss," he emphasizes.

For the next two years, Zalta brought his fix-up cars into a BMW shop owned by a friend, who let him use the equipment and also served as a teacher–"although I sometimes had to wait for hours to ask him a question as things were so busy." He then apprenticed for five years with a VW specialist–"one of the most important people in my life," Zalta asserts, "as he was willing to share his 25 years of knowledge with me."

When the specialist decided to retire from the repair business, he offered to sell his space to Zalta, who "went for it and never looked back. Even when the existing customer base dried up, I kept following my heart and was busy almost from the first day," says Zalta. "Word of mouth has always been my only means of promotion–I didn’t even have signs for the first seven years."

When asked to what he attributes his enduring success, Zalta reflects a moment and then replies, "I learned a lot more than I thought from my father in terms of honesty, personal attention and fairness. He always had patience with people, and listened to their concerns.

"Recently I was sitting in my small office, with stuff all over the place, and remembered my father in an almost identical setting in his retail store," continues Zalta. "All of a sudden I saw myself in him, and realized that I was a chip off the old block after all. I called him right away to tell him."

According to Zalta, "there are a lot of stereotypes about auto mechanics ripping people off, and I decided that what’s often missing is a clear explanation of what is being done and why. It’s also crucial to listen carefully to customers so you give them what they really want and need."

And what is Zalta’s bottom line? "I treat people the way I would want to be treated."

Although he could easily have expanded his operations over the years, Zalta (who now has one to two mechanics working with him) intentionally rejects this option–"I’d lose the quality of what I’m able to provide on a smaller scale," he explains. "It would be like going to a large and impersonal urban hospital instead of being treated by your small town family doctor."

As Zalta emphasizes, "my business is currently the biggest it can be and still allow me to be in touch with all aspects of it. My name is on everything that goes out of here."

"Even though I’d been the bookkeeper here for 15 years, it’s not the same thing when you take the reins yourself," asserts Joan Dudley, who became co-owner of Modesto, California-based Hotsy Pacific in 1991. The firm, which sells and services industrial pressure washers ranging in price from $600 to $50,000, was founded by Dudley’s father in 1965 out of the back of his truck when he became a distributor for the parent company. He decided to sell the business to Dudley and her partner, Jim O’Connell (who handled the service side of the operations) upon his retirement, and that’s when the trouble began.

"I made some mistakes," Dudley recalls, "including hiring salespeople who didn’t work out. In addition, the industry was coming into maturity after 30 years, and attracting a lot more competitors–including Home Depot. We were continually operating in the red and, by December 1995, had accumulated significant debt. I literally kept the business going with my personal credit cards."

Dudley, who describes herself as an inherently optimistic and positive person, admits that the situation "was taking its toll. I had drifted into negative thinking, and even told Jim that perhaps it was time to sell the business. His reply–‘We’ve stuck by you through thick and thin, and are not going to let you quit’–turned me around."

Recharged with enthusiasm, Dudley decided that "first of all, we have to change our attitude because energy begets energy. Every person who comes into the store will be greeted by a happy person," she vowed.

Dudley started actively networking, began holding weekly employee meetings, and asked for a five-year commitment from all the staff. She also insisted that "we have to put our families first and enjoy our lives as well as the business," and cut weekly hours down to 50 maximum.

In addition, a salesperson from a competing company who offered his services was quickly hired for a mere $7 an hour. "I told him we didn’t have any money, but he was not dissuaded because he knew we had maintained our reputation and credit with our vendors all this time, and was willing to take a chance on our recovery," notes Dudley.

From her perspective, another real breakthrough occurred when she attended an association meeting featuring Kent Burnes, a nationally-renowned consultant on entrepreneurial issues. "He was the first person who really spoke my language," she remembers, "and made running a business human."

Taking his advice on a variety of operational subjects to heart, Dudley "revamped and computerized the company’s inventory, restocked $20,000 worth of parts to vendors (thereby freeing up working capital), and threw away another $20,000 worth of ‘dead’ inventory." She also revamped the pricing system, and called the local SBDC (which, in her words, ‘helps small businesses stay alive") to request the assistance of a financial consultant.

The final "ace in the hole" was an unsolicited $25,000 credit line under the business name that Dudley received from Wells Fargo Bank, which she attributes to "the gold-plated credit I’d maintained despite all those years of struggle and being a female entrepreneur."

(San Francisco-based Wells Fargo, the largest U.S. lender to small businesses, has doubled its small business loan volume in each of the past two years. And, joining other large banks and savings and loans that are focusing on this market, Bank of America increased its small business lending more than 50 percent in 1996.)

"All this fell into place at once," says Dudley, who proudly notes that within six months, Hotsy Pacific’s fortunes had turned around. By August 1996, the company became profitable, and has remained so ever since. In fact, revenues were up 26 percent at the end of 1997 versus end of 1996.

"Everyone’s happy now and we’re having a blast," Dudley concludes.

Lifecycle planning is crucial when making financing or marketing decisions. But don’t overlook it when designing benefits and insurance packages either. Implementing benefits to match your company’s stage minimizes risk, supports growth, and allows you to attract and retain outstanding employees. Talk to your insurance agent to make sure you are not missing key areas of coverage appropriate to your current cycle. Here’s how to apply lifecycle thinking to the benefits arena:

Pre-Startup Stage

The primary goals at this stage are risk minimization and personal protection. Consider:

- Property/casualty coverage

- Personal life insurance

- Disability income protection for you

- Term life to cover liabilities

Development Stage

Now that you are a going concern, you can step up your benefits to include added coverage for yourself and your employees:

- IRA, SEPP or Keogh for you

- Key person insurance

- Term insurance conversion

- Buy-sell funding for partnerships or corporations

- Group health

Growth Stage

A rapidly growing company needs to pull in talented people; a flexible and generous benefits plan helps you do that. It’s time to add:

- Life and severance pay plan for you

- Salary deduction plan and profit-sharing for employees

- Group disability income protection

- Section 125 Flexible benefit plan

- Deferred compensation plan for key executives

- 301 (k) plan or corporate pension plan

Comfort Stage

During this cycle, take time to review your current plans and see where they need upgrading or updating:

- Pension plan review

- Financial and estate planning for you

- Replacement of group term

Turnaround Stage

Handle benefits with kid gloves when you hit a turnaround situation. "Remember that something given is hard to take away," warns Russell Fletcher, a San Francisco-based agent with Equitable Life Assurance Society of the United States. Instead of taking away a benefit, try raising the employee deductible to reduce your premium; then help employees with out-of-pocket costs as you are able. Or try moving to a cafeteria plan that allows employees more flexibility to meet their needs. Always consider the effect of any decision you make on employee morale–laying off a full-time position may be easier on the company than hacking everyone’s health plan down to the bare bones.

According to bankers, the following "five Cs" of credit are key to getting a business loan:

Character. The business owner’s personal credit history and track record for paying personal bills and taxes is the starting point. While an occasional problem may not hurt, consecutive missed payments will. Tax liens flash a warning sign, as do recent inquiries from other lenders. If you filed for bankruptcy within the past 10 years, you probably won’t get a loan unless you have entirely repaid your creditors.

Cash Flow. Will the business be able to generate sufficient cash flow to pay its bills as well as the loan? It helps to have been profitable for two of the past three years. If you are a corporation, cash flow (net profit plus non-cash expenses) often must be at least $1.50 for every dollar of loan payments. For sole proprietors, debt should be less than half of income.

Capital. The amount of money the borrower has put into the business shows his commitment and the strength of the company. Banks usually require 30 to 35 percent equity or cash investment in the firm.

Collateral. Most small business loans are secured by assets such as cash reserves or other items of value like real estate, CDs, stocks, or inventory and equipment. These assets, which should be available in case of a sudden operational downturn, ensure the borrower’s commitment to repayment and to the venture in general.

Condition. Is the business in an industry that is growing? What is the life cycle of your product or service?

Excerpted with permission from Small Business Success, Volume XI, produced by Pacific Bell Directory in partnership with the U.S. Small Business Administration.