In 2016, a remarkable 650,000 new businesses were started in the UK. Sadly, by 2021, 260,000 of them are likely to have failed. Why? There are numerous reasons, but often, the problem is financial – and people who spend their time helping start-ups see them make the same financial mistakes again and again. Knowing what those are is the first step in avoiding them and making sure that your business is one of the survivors.
Not keeping track of money
It sounds obvious, but you’d be surprised by how many business owners don’t keep proper records of what they earn, what they borrow and what they spend. That is important for tax purposes – and you’ll give yourself a hell of a headache at the end of the year if you try to chase everything up then – but it’s also important because losing track puts you at risk of overreaching yourself. Efficient money management also helps reassure potential lenders when you need a loan.
Not allowing for overspend
Because most businesses are founded in a spirit of optimism, business owners frequently draw up plans that rely on keeping budgets tight and spending the absolute minimum on everything. In practice, this almost never works out – costs often end up bigger than expected and then money must be found from elsewhere, putting the business under strain. A good rule of thumb is to allow an extra 15% on overspend for every project.
Another problem with optimism and ambition that are otherwise useful in business is that they can drive inexperienced business owners to gamble recklessly, putting all their money into single strategies. Sometimes they pay off well, and you’ll read about such cases in the papers, but they can just as easily lead to disaster. When you have only a few eggs, don’t keep them in one basket – diversify your strategies and assets to keep risk manageable.
Charging too much – or too little
Some business owners assume that if they need more money coming in, they can always put up their prices. Others decide to sell as cheaply as possible to attract more customers. Either can leave you struggling. Again, moderation is a wiser approach, especially when you’re still finding your feet. Do your research and aim to find the optimum price for each of your products or services. Understand your customers and their priorities – are they low on cash or do they prize quality?
Not investing in people
A hard-working, skilled team is the most valuable asset that most new businesses have. Don’t risk losing team members by paying them so little that they soon find themselves tempted to go elsewhere – and that includes you. When recruiting new people, don’t offer the minimum wage – pay the going rate to bring in professionals with the skill levels you need. Invest in training to make your team members feel valued, boost their loyalty and increase their productivity.
Not investing in technology
Business owners are always looking for ways to cut corners, and one way you can do this without harming your business is by bringing in technology that simplifies, streamlines and improves your processes. That does require upfront investment, but it pays off because it enables work to be done more quickly and effectively. Do your research to choose the right products, train your team appropriately, and look out for government schemes that offer grants to help fund such investment.
Mixing business and personal funds
When you have a box in your office for petty cash, it can be tempting to dip into it when you’ve forgotten to bring cash for buying lunch. When the boiler in your house goes on the blink, you may want to take a loan from your business instead of from the bank. But mixing business and personal funds can easily get you into trouble. Remember that your business is your source of income and must be protected. Equally importantly, you should resist pouring all your savings into it.
Failing to put money aside
No matter how good you are at running your business, things can go wrong. You can’t control the global economic climate, and it’s not always predictable. You can’t rule out having sudden, unexpected expenses; perhaps a key piece of equipment breaks or an opportunity arises to make a promising investment. That is why it’s vital to have some savings. If you do end up needing a loan, showing that you can meet part of your costs yourself will secure you a better rate from lenders.
Letting people rip you off
Part of the process of looking after your money entails chasing up people who fail to pay you on time or who are unscrupulous in their dealings with you. For instance, many businesses have recently found that the new Financial Conduct Authority rules on payday lending mean they can make a payday loan claim to reduce their outgoings. Chasing money can be stressful but there is help available, and it sends a message that you won’t let yourself be exploited.
Where to get help
If you’re struggling with any aspect of business finance, you can call the government’s Business Support Helpline for straightforward advice on what to do. You can also get help from your Local Enterprise Partnership or talk to your bank – many offer free financial advice to start-ups. Joining the Federation of Small Businesses is also a useful way to obtain help and support from experts.
Networking is important for all businesses, and when you attend networking meetings, you’ll find people in established firms happy to talk you through how they have dealt with everyday business problems. Some sector-specific business networks run mentoring programmes so that there’s always someone you can turn to for advice.
If your business has any major investors outside your team, you can consider talking to them about your financial situation. Naturally, you won’t want to paint a bleak picture and put them off being involved, but they can often be a big help when you weigh up decisions around pricing or the purchase of equipment.
When you’re running a start-up business and working long hours it’s easy to feel isolated, but in fact there are lots of other people out there hoping to see your business prosper. With their help, you can be a success.