Start with the end in mind when you start your business. The first three years of the life of a new business are crucial in its development and are often wasted by indecision, uncertainty, confusion and a lack of clarity as to the company’s direction and objectives. This can mean that a company doesn’t survive the first three years or limps along only two fall shortly after.
Those that get through the first three years in good shape can often find when they look back that they have sacrificed millions of pounds of final value due to losing the growth from those first three years.
Why does this take place and what can you do to prevent it.
The first mistake that most small companies make is to be under-capitalised. This means that they don’t really have enough money to trade through to profitability or to pay for the advice and support in the first year of operations.
It can also mean that I have under estimated the amount of working capital required due to the gap between paying for that supplies and overheads and getting paid by their customers. This can be exacerbated due to overseas trading with excessive delivery times due to shipping timetables. All from the manufacturing process requiring between 3:00 and six months even before the noble credit terms for payment are taken into account which can result in it being six months from the purchase of the materials 2 being paid by the customer.
I’ve written previously about the lack of proper planning undertaken by start-up businesses and that the business is often characterised by optimism and hope rather than calculation and planning. This can mean that the product is priced too low and therefore the profitability is also low which affects cash flow and increases the breaking turnover level often to a point that unachievable.
Probably one of the most challenging aspects of starting a business is that the difference between what you assumed to be true in the run up to launching the business and what is actually true when you undertake business with your customers can be very significant. This often reveals itself in excessive optimism around the sales process. It may be assumed that it is easier to obtain customers than planned.
This can reveal itself when the assumption was that it would take three months to obtain a customer. In practise it might take up to two years. This has a significant impact all the companies break-even point and on the capital required to run the business through this two year. It is therefore very important to be able to be flexible and the original assumptions are wrong and to flex the forecasts to see the impact of business reality. This will then provide a basis for understanding the revised working capital requirements and plans can be put in place to address this problem before it gets out of control and takes the business down.
Often businesses don’t have clear understanding or plans around their most important statistics. these are:
- How the company actually makes a profit and if that profit level is sufficient to maintain the companies future.
- What is the level of sales required to break-even? This means the level of turnover which will not only cover costs of sales but all the overheads. It is surprising how many companies don’t understand this not only from an annual basis but on a month-by-month basis in those first 12 months.
- Often companies underestimate the overhead burden that they will need in the three years. Especially those who need to be employed in support and back-office roles. These can be undervalued since the focuses on sales and manufacturing. However, without a properly functioning back-office company well let’s crisis to crisis.
- As I’ve written above the challenge of actually getting sales. Understanding how these are obtained and what activities need to take place in order to generate these sales is often something that is underdeveloped in the mind of those running the business. Especially what happens if the preferred route is not found to be effective. It’s important to be flexible in mind and understanding and be able to take corrective action very quickly after the problem is identified.
- For many each business is the financial needs of the founder and the financial needs of the company can get very muddled indeed. This can be especially true if the business centre is under pressure to spend money outside the business on his family and their needs.
Therefore, the founder should ensure that he has a clear understanding of his own financial needs during the early stages of the business. Negotiated these with his wider family so as to reduce tensions during what is a very difficult time starting a new business.
The summary of the mistakes above is obviously limited due to space and there are others which may affect you in your business in addition to of those that I have covered above.
The most important recommendation I would give is to ensure that you have good quality natural business advice before starting the business so as to avoid burning up very valuable capital drawing that first to three years.