I have spent the last 16 years advising small and micro-business startups through my accountancy practice, BirchCooper Accounting Services.
I really enjoy working with this sort of business because I find the diversity and energy inspirational. It’s always exciting watching them grow and thrive. However, it’s not always plain sailing. I want to share with you some of the common warning signs I’ve come across so you know how to avoid failure.
1. Cash flow problems
You may have heard a saying “profit is vanity, cash is sanity”. This is very true. Even if a business is making lots of profit, it will be worthless if the cash isn’t there to keep the company trading.
Don’t forget – a balance sheet may infer that the business is solvent, for instance, it might have assets in the form of equipment and debtors. However, if the cash isn’t there to pay your suppliers, the VAT-man or the taxman, then it will all be meaningless and the business will soon fail.
Cash is king. Remember, balance sheet solvent means nothing if you can’t pay your debts as and when they are due.
2. Debtor payments terms too long
Here we’re talking about how long it takes for your customers to pay you. You should make your payment terms as short as possible, but as long as practical to ensure that you remain competitive. Bear in mind that many customers will not adhere to these terms. Make sure you make these terms clear and chase your customers for payment, regularly. Failing to do this may mean that some of your customers might start to see you as a bit of a “soft touch” and pay others, ahead of you.
Don’t be seen as a soft touch. It’s your livelihood, so don’t worry about chasing customers for payment.
3. Not having enough capital to start out with
It’s vital that you’re completely clear from the outset as to how much you will need to get the business up and running, both for initial requirements and for initial trading, this might include:
- Deposits (rent etc.)
- Initial stocks
- Borrowing costs
And don’t forget to budget for your personal income as well.
Understand your requirements from the outset by writing a detailed business plan.
4. Not having funds in place for a contingency
In addition to not having enough initial capital, you should also be prepared for the unexpected.
There will be a temptation to take money out of a business to fund your income needs, without enough forward planning.
However, you need to ensure that you leave funds in the business to cover for:
- Tax/VAT/PAYE bills
- Unexpected costs, such as repairs
- Higher than expected borrowing costs
By not allowing for these contingencies, you run the risk of the business becoming insolvent, which means the business can’t pay everyone that it owes money to. In the case of a limited company, the company has an obligation to close down.
Prepare for the unexpected. Don’t take everything out in Directors Loan Accounts or dividends straight away.
5. Making naive business decisions
Many business owners I’ve worked with, will spend lots of time on the “exciting” aspects of their business, such as getting those new clients/customers and making those first sales. However, whilst getting caught up, in this excitement, they will often make business decisions based on advice from “the man down the pub”
- You should incorporate to save tax
- Register for VAT on the Flat-Rate Scheme – you’ll make some money here
- Put the cost of your car, through your limited company
You need to bear in mind here, that just because some of these ideas have worked for others, it doesn’t mean they are appropriate for you.
I’ve seen many businesses who are working through an inappropriate structure. For instance, a window cleaner, who has become a limited company to make some tax savings, whilst not considering the additional compliance costs.
Make sure you take appropriate advice from:
- An accountant
- A Lawyer
- An HR specialist, if you are thinking of employing people
Whilst you might be reluctant to pay for this advice, it will usually save you money and compliance issues in the future. And make sure you ACT on ALL of the advice, not just the advice that you WANT to hear!