Successful entrepreneurs’ advice on how to ride out the three-year glitch
STARTING a business is not easy. It’s a monumental decision like getting married, buying a house or having children. So much energy goes into getting it off the ground in the first year that it seems odd to focus on the third. But the third year really does matter. It’s a decisive year when most businesses have grown and taken on overheads like an office or staff.
And it’s these obligations that get even the brightest business owners in a pickle. A recent YouGovStone survey shows that nearly half of entrepreneurs run out of money or come very close at this stage. Even more shockingly, one in five have missed payroll due to financial difficulties.
The chances of hitting the financial rocks after an economic downturn are even higher. In 2009, for example, a total of 279,000 business shut down, according to Office for National Statistics figures. That’s 12 per cent of the total 2009 stock of firms in a single year.
STRONG ON IDEAS
“Entrepreneurs are strong on ideas but often struggle when it comes to managing the money and that can be the difference between success and failure. Too many fail to implement effective accounting systems from the outset and then pay the price as their business expands,” says Pernille Bruun-Jensen, the managing director of Intuit UK, a small business software company. It’s not just the numbers that can trip up a young business. We ask those who successfully weathered the storm how they coped.
Intuit UK launched a Business Bootcamp at last week’s MADE: The Entrepreneur Festival to help early-stage ventures overcome these pitfalls.
LARA MORGAN | FUN-CTIONALITY
“For me the first few years of business were entirely focused on sales. It was just me and my phone plugging away. It needed to be – it was the foundation of my future success. This all changed in the third year. I suddenly reached a stage where it became clear that I needed to expand and to do that I needed to professionalise what I was doing. I needed staff, an office and a computer network. All of this was entirely new to me and required me to learn a lot of legal and technical jargon in a short space of time. It was a lot of hard work and I had to put even more energy into the business and at that stage I didn’t think that was possible.”
RUPERT LEE-BROWNE | CAXTON FX
“Most businesses start out under-capitalised in the first three years. Therefore managing cashflow is imperative. Customers will always want to pay late and suppliers will always want payment up front. So managing this with little or no financial buffer can literally be the difference between success and failure. Aside from the seemingly unending day-to-day tasks of running the business, owners need to be ruthless about getting money in. At Caxton FX we were (and still are) absolutely adamant about payment: no money in, no service out. Bad debtors are chased through the small claims court, which though complicated and very nerve-wracking the first time, became just a standard operating procedure. On the flip side of that, I also laid down a policy of paying suppliers when they invoiced us, rather than delaying payment. This policy gave us a very good reputation and loads of goodwill that is vital for any small and growing enterprise.”
IVOR MASSOW | PAYMEMY.COM
“The biggest problem I faced in the third year of my last business was improving my online presence. Nowadays, unless you have a high Google ranking your business is toast. To overcome it, I did some research and worked out how to make sure that the new launch of my website was given enough time to be registered on Google. By this I mean, don’t allow your designers to keep your website off-line while it’s in the early stages. Keep all the working information on the URL you intend to use.”
PRIYA LAKHANI | MASALA MASALA
“We just had our third birthday in August. For us, the big challenge has been considering what we should do next. Most startups work on a one, three and five-year plan. Entrepreneurs need to use each of these landmarks to reassess the market they are in. It’s all too easy to be wedded to your original ideas. I got myself distracted last year with an idea for a totally new product. With a bit of reassessment this year, I realised I should be concentrating on what I already do and doing my best to conquer that market rather than starting something else. Nobody can be an expert in any field in less than three years. I suppose I need to rein in my entrepreneurial spirit for the meantime and get my head down.”
UZAIR BAWANY | FAIRWAY SEARCH PARTNERS
“People who join you early on in the journey enjoy the thrill and excitement of growing something. However, unless they see things developing for themselves, they tend to feel a little used and frustrated. I found that many members of staff preceived that they were the only ones responsible for the business’s success and were therefore entitled to more. They forgot about all the risk that I had to take, the investment I made and the sleepless nights I had worrying about the business. I tried to deal with this by making opportunities wider for my staff. I tried to move people into roles where they felt more valued and put staff beneath them. This helped everyone see that they were valued but not indispensable.”
PATRICK REEVE | ALBION VENTURES
“I started the business in 1996, when it was part of Close Brothers Group. Although it was in the venture business, it was Close’s first public company fund, and we had to set a very low risk investment policy. So we just invested in property assets with no bank borrowing and grew nicely for the first three or four years.
But this policy didn’t sit hugely comfortably with the word “venture” and clearly wasn’t going to be sustainable in the longer term, so we had to work to transform ourselves into a proper venture capital house. This was unfortunately at the same time as the dot-com boom. Luckily, by the time we had broadened our investment policy to include technology and built up our team, the boom had bust. While it meant that we didn’t raise much money, we also managed to steer clear of the mistakes made in 2000-01, and so avoided the resulting hangover.”
SHOW ME THE NUMBERS | KEY STATISTICS
500 small business owners and sole traders were polled across the UK by YouGovStone. 77 per cent of their businesses were less than three years old.
● 74 PER CENT said the first year was stressful.
● 64 PER CENT launched their business with less than £5,000.
● 86 PER CENT were self-financed.
● 33 PER CENT would run their business differently if they were to start again.
● ONE IN TEN spend more than a day a week managing their finances and administration.
● 29 PER CENT spend more time managing their finances than they expected to.
● 75 PER CENT rely on pen and paper or spreadsheets to track their business performance.
● 44 PER CENT have run out of cash or come very close.
● ONE IN FIVE have missed payroll due to financial difficulties.
● ONE IN SIX have experienced troubles with late payment.
● 68 PER CENT said winning customers was one of their biggest challenges.
● 31 PER CENT have made mistakes with HMRC and for 14 per cent it resulted in a fine or an overhaul of financial processes.
Source: YouGovStone