Birmingham is an undisputed entrepreneurial hot-spot. It took second place in the league of top ten cities for start-ups across the UK last year, with a staggering 14,509 new companies registered in 2019.
That should be incredibly exciting and something to celebrate but the sad fact is, according to statistics, around 20 per cent will close their doors within just 12 months and less than half will make it past the three-year mark.
There are many reasons a business might fail. Some would-be entrepreneurs are simply unprepared for the hard work and determination required to get a new enterprise off the ground. They have a rose-tinted view of being their own boss, doing something they enjoy and only working the hours they want, whereas anyone who’s been there and done it knows success only comes with graft and grit.
They might underestimate the competition in their chosen field and fail to make their mark as a newbie in a crowded marketplace, whether that be through a lack of initial market research on their part or a failure to clearly define their offering and set themselves apart.
I would say the majority of promising new ventures, however, meet their demise due to insufficient planning and a lack of understanding of basic financial concepts such as forecasting and managing cash flow.
No matter how passionate and hard-working you may be, bad management can crush even the most innovative or theoretically sound start-up business. Before anyone embarks on their business journey, they need to be confident that their business model is sustainable, backed up with hard facts and realistic targets.
As an accountant who has helped a variety of start-up businesses survive throughout their first year and beyond (and as a small business owner myself) my advice would be to put as much effort into the initial preparation and planning as you can before you make any hard and fast commitments. This is how to avoid becoming one of the 20 per cent who don’t make it past that vital first milestone.
Have a strong goal in mind
Before you put pen to paper and start drafting a business plan, ask yourself this question. Why do you want to run your own business? What is your carrot, the tasty target that’s dangling in front of you that you’re willing to put in the donkey work to reach? If you simply don’t want to work for someone else, are looking for quick time or labour-saving wins or want an easier life, I would question whether this is for you.
You need a driver that will keep you working at it, even when times get tough because starting a new business is never plain sailing. Only a strong enough goal will give you the resilience and determination to see it through. It may be that you want to provide for your family’s future, build a business you can work on with your partner or maybe leave a legacy of a family business for your children. You may want the ultimate work-life balance where you have a business that runs without you and provides an income without much input. Or are you passionate about developing your chosen industry and feel you have the expertise to improve standards in what you do?
Whatever it is will be unique to you, but it has to light a fire in your belly and provoke the dogged determination to achieve it and you have to understand that it will take time and effort (and a lot of it!).
Be realistic about your financial capabilities and expectations
Before you can work out whether a business is viable, you need to examine your current financial situation and know exactly what you can afford to invest, what you need to bring in to make this work for you (short term and longer term) and, although it’s not something you’ll want to think about, you also need to consider what you could potentially stand to lose if your venture doesn’t work.
I’ve seen promising businesses fail because owners have overestimated their earning potential then, six months down the line, realise they’re not going to be able to make ends meet and have to find alternative employment.
We all have personal financial obligations and you need to know that you can cover your expenses if you can’t guarantee a consistent wage in your new business to begin with. Are you intending to live off your savings for a while and, if so, how long can you do that before you need to see an income? Will your partner be able to cover the costs on their wage? What would happen if you had an unexpected expenditure land in your lap? What would happen if your business didn’t meet expected targets?
Although it’s tempting to throw yourself into a new venture, you should only do it based on a measured decision on affordability.
Have you factored in outsourced services?
Do you have the necessary skills to fulfil all aspects of the business including accounts, marketing and operations? And do you have time to do it all? If not, you’ll need to outsource and that comes at a cost. If it’s an essential cost to make sure the business moves forward, build this in from the outset.
Time can be a key factor here. Even if you know you can do it all, will you have the time to not just fit it all in, but dedicate enough tine to do it effectively? Many fall foul of entrepreneur’s burn-out because they take on too much and simply can’t keep the pace when doing everything themselves.
Focus on the customer
For any new business to work, you have to take a step back and think about who your ideal customer is and what they really want. Have you asked them? Look at everything from a customer’s point of view and do some research to back it up.
So many businesses start up with an idea of who they are selling to and what their unique selling point is, then find out it’s really not an important consideration for that market, or something they’re only willing to pay a minimal amount for. Who has a real need for your product or service? What problem are you solving for them? What are they willing to pay for that solution? Why would they come to you? Don’t guess at this stuff, it’s crucial you do the groundwork and make sure you’re pitch perfect in your sales and marketing process.
Monitor the numbers from DAY ONE!
If you’re confident you’ve got all the above in the bag and have a viable business proposition with the plan, the finance, the focus and the determination to make it a success, fantastic! But don’t miss out this vital step when you start. Don’t just keep records of your accounts (which is also crucial), monitor the numbers closely and use them to refine your offering, make changes to your plans where necessary and make informed and sensible decisions.
Your business will ultimately succeed or fail on profit and cash flow, so regular and ongoing evaluation of your finances is a must. What is having a positive impact on your income? What is taking too much of your time for very little gain? What are your greatest outgoings and can you trim expenses? Are you operating in the most tax-efficient way?
Having an accounts expert on-hand to help with this from the outset is one of the best investments you can make – and I’m not just saying that because I’m an accountant! It has been proven time and again that it’s all too easy to take your eye off the ball where finances are concerned when starting out. You want to do the exciting stuff and the accounts get put to one side.
Make sure you have someone who will keep you on track, ask the hard questions, measure the successes and failures in financial terms and monitor the numbers. Let this slip and you’ll slide into that 20% statistic all too easily.
Get Smart can help your business become more profitable, so YOU can fulfill your dream. Take the first step today by telling us what you would love to achieve here.