10/07/2012

With only one in five start-ups succeeding, Clive Lewis, ICAEW Head of Enterprise, asks if it’s why the business was started in the first place

Every year in the UK between 300,000 and 400,000 new businesses start but a similar number cease trading. The total number of businesses in the UK has stayed fairly static since the recession at 4.5 million, but it has approximately doubled in the last 30 years.

So why do people become entrepreneurs? Usually it is for one of the following reasons

•They have a skill, trade, profession or vocation and want to exploit opportunities

•They have a hobby or interest which might generate an income

•They buy a franchise

•They need an income

•They have a new innovative product/ service/ idea

Usually the first category of new businesses present a low risk of failure because they already have experience in the trade or profession and have built up contacts for potential customers or suppliers as well as having learnt the basics of the sector. Perhaps buying a franchise represents the least risk but often requires significant investment to purchase the franchise. The people starting because they need an income are usually doing it because they cannot find full time permanent employment and they will usually return to employment as soon as they are able. The last category is usually the most entrepreneurial because they have a vision for a product or service or believe they have spotted a “gap in the market”. However the challenges they face are usually the greatest because they are creating a new product, service or idea and have to develop a completely new marketplace.

One in five chance

Are start up businesses sustainable? Well in terms of longevity only one in five businesses will last ten years with ten percent ceasing within a year and a third closing in three years.

Why do so many businesses cease trading? The three most frequent reasons are the owners move back to employment, decide there isn’t enough money in the business so it becomes a part-time business or the business fails resulting in insolvency or bankruptcy. Other common reasons include selling the business or a merger with another business. Amongst more established businesses selling or closure can be followed by retirement.

There is no doubt it can be highly financially rewarding. But many people do not go into business simply to make money. Probably the main reason is to be your own boss and “be in control”. However people also like the idea of building something from scratch. Being a local business can also offer a place in the community as an entrepreneur role-model. There can also tax advantages in being self-employed through being able to access allowances, particularly if the business becomes a limited company.

It can be lonely being the boss particularly when you have to make “hire and fire” decisions over staff. Managing cash flow to ensure the business always has money to pay staff and suppliers and keep the bank happy can also be very demanding. Also running a business you have to be a Jack-of-all trades not least in keeping on top of paperwork and the regulatory burden. Other aspects which cause problems for new business owners are the constant need to “get out there / get known” and the difficulty in “selling” your business proposition. Many start-up businesses also demand long hours during the early stages of development.

So being in business is not for everyone, particularly if you are risk averse or need a regular income. Also it is possible that your personal circumstances/ financial situation may mean it is the wrong time to start-a business – for example if you need a steady income to meet family commitments or pay a big mortgage. So you should consider the alternatives such as starting a part-time business or gaining experience in chosen sector to start a business later in life.

The experience of running a business can be summarized in two quotes from a Barclays Bank ‘Running a business’ survey: “It’s the most satisfying and liberating experience I can imagine and a fundamental part of my life that I could not surrender” and “The practicalities are sleepless nights, worrying about my staff and how I can pay them every month and where we can find new business”.

Hopefully if you are about to start a new business your experience will be more like the first quote.

Starting a business can be a challenging but very rewarding experience. However in the early stages it is advisable to minimise the likelihood of failure, most notably running out of money. Perhaps the first step is to “shorten the learning curve” by having previous experience of sector or employing someone who has. Some of the steps to take to avoid running out of cash include close management of cashflow, minimising overheads and keeping working capital investment low by minimising the amount of stocks and keeping debtors as low as possible. You can also match the type of finance utilised with the purpose it is required for e.g. by buying any fixed assets by hire purchase or leasing. Even with these measures it is prudent to keep as much spare cash at bank or unused overdraft facilities for contingencies

However, not all business ideas result in a successful established business. Whilst obviously giving your business idea time to prove itself you should be prepared to recognise it’s not working out. Possibly this means setting a time by which you expect the business to be established and providing you with the required income.

Starting a new business presents many challenges and as an entrepreneur you will learn a great deal and obtain new skills. Perhaps the greatest new skill is to learn from your experience and be adaptable. You need to constantly asking what works and what doesn’t work? Until you feel fully confident a mentor - someone who has faced the challenges of starting a business and succeeded – can help with the learning.