Comment from Mark Perrin, a partner at chartered accountants and business advisors Menzies LLP
Comment on the major challenges facing companies in their first year of business.
Mark Perrin – Partner at chartered accountants and business advisors Menzies LLP
Professionals often list some of the following as challenges for companies in their first year of trading; maintaining accounting records, registering with HMRC for VAT and PAYE, selecting the right legal entity, setting up a bank account.
While these areas need to be addressed, they’re not the major challenges facing start-ups and certainly not the reasons why many start ups fail in the first year.
What are the challenges?
Having a credible, commercial business plan. Too many business owners don’t have a robust business plan in place at the start, and therefore don’t have a clear idea on how their business will make money.
Too frequently people start businesses based on an unsubstantiated idea or because it’s a hobby that they enjoy. There is nothing wrong with establishing a business that is enjoyable, but crucially will it make money?
Understand your target market and your positioning within it
Many start up businesses don’t conduct anywhere near enough market research to establish a clear understanding of the target marketplace.
It’s vital to understand the marketplace that you wish to trade and compete within. You need to check out the competition and understand what they do well and what they don’t do so well, and whether you can exploit their weaknesses.
Assess the pricing points in the marketplace
Pricing is a challenge. You need to agree your quality and pricing positioning in your target market. Are you providing high quality products and services and charging a premium rate or a high volume offering at a low price? It is important you understand pricing points in your marketplace.
You need to clearly define the range of your products and service offering including the “benefits” which your offering brings. Ensure these benefits will be consistently communicated to the marketplace through all methods of communication such as your website, and through social media, written and verbal communications.
It is worthwhile creating a profile of what an ideal customer will look like for your business, and then identify how you can promote your offering to your target customers including who you can establish business relationships with to access these types of customers i.e. your sales channel.
It’s also worth preparing a simple but effective sales and marketing plan to focus your activity. You need to focus your efforts on the areas that you believe will generate sales and cash flow at the earliest point to get your business established.
Prepare considered and realistic financial forecasts
In my experience, many start up businesses do not spend sufficient time considering the financial assumptions which will underpin their financial forecasts and their business plan.
As a result, many start up businesses run out of cash far too quickly. Ultimately, they are underfunded from day one because the business plan and financial forecasts are far too unrealistic.
Business owners fall into the dual trap of being far too optimistic on how quickly the business will generate sales and underestimating set up costs. Both of these pitfalls can starve the business of much needed cash flow very quickly.
While the key assumptions behind the financial forecasts need to be those of the owner, it is advisable to have these forecasts independently reviewed by professional advisors who have the necessary experience to challenge and guide the new business owners.
Time management for both management and staff
There is always so much going on when starting up a new business, and the owners – normally the management team – often try and do too much. Yet, the first few months of a start up, and how efficiently the staff and management work together, is often crucial to how successful the business will eventually be.
Every hour counts, so the management team cannot afford to become distracted on areas of the business which will not provide pay back in the short term.
Business owners will freely admit that they try and do too much, and yet outsourcing services such as bookkeeping, payroll, legal and HR services, where possible, could free up the management to concentrate on driving the business forward.
Prioritising management and staff time regularly is a valuable exercise. Management must be ruthless in their decision making on where they invest their time, as it will be a key factor in whether the business succeeds or fails.
Investing in staff
The business plan should be very clear on what level of staff need recruiting and when they need to be recruited.
Recruitment is likely to be a significant investment by any business so it is vital the right people are recruited, and a bad hire could significantly impact on a business.
Many start-up businesses say that their first recruits are people they know. This is a safe route because you know the skills they are bringing to the business.
However, at some point you will need to go to the marketplace. At that point it is prudent to involve some HR expertise in the interviewing process if this is not your background.
For more information or to enquire about how Menzies LLP can support your business startup, contact us directly.
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