23 March 2015

Beware the ‘third year boom and fourth year bust” – the small business curse.

Businessman using binoculars, money reflected in the lens

An unusual business phenomenon that I have observed is the third-year boom and fourth-year bust. Once I became aware of it, I started to notice how real it was (and how common it was). The first year of business is generally pretty hard but exciting. It’s the year where you jump for joy when you get your first customer or the first big contract and at the same time bite your nails wondering how to pay the electricity bill. It’s a year that goes by quickly because there is so much happening.

Assuming that you have made it through the first year, the second year starts and you are a lot smarter. You have made a few mistakes, lost some money, done some great work and some that you might like to forget. Financially it’s still hard, but you can see light at the end of the tunnel. Towards the end of the second year you start to notice that there is always a little more money left in the bank account at the end of the week, and you seem to be getting more and more customers because word of mouth is starting to spread about just how wonderful your business is. At the same time, you are tired and stressed because it’s been a hard two years.

You are into the third year and business starts to boom. At the end of the week there is a lot of money left in the account and you can now start to reward yourself. Perhaps you buy yourself a new car, maybe even a new house, maybe a good holiday. While you are busy spending this money, phone calls aren’t being returned, customers are starting to leave, bills aren’t getting paid and you don’t notice.

As you start the fourth year, your attention is shockingly brought back to the business when the tow truck pulls away with your shiny new sports car. At about the same time, the bank rings to say that your account is overdrawn, creditors are ringing for overdue accounts, the tax man comes knocking on the door and then, it all comes crashing down. Finally the business goes bust.

I’m not saying that every business goes through this cycle, but if you keep an eye out you will notice that it happens a lot. If you wake up one day, pay all of your bills and find that there is money left over, be careful, be very careful, because you might just be entering the third year boom – and now we know what that leads to!

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