How can you avoid disaster as a start-up?

Expert Nick Hood's tips on how not to be a business casualty

Every year thousands of great new enterprises launch, and every year a significant percentage fail. But just how do you avoid your new venture becoming another business casualty?

Startups.co.uk spoke to Nick Hood, senior London partner at corporate recovery specialists Begbies Traynor , to find out about the pitfalls and perils of starting up, and what to do if things don’t go according to plan.

What should startups bear in mind if they want their business to succeed?The main principle is to follow business disciplines, understand what’s going wrong – or what’s not going right enough- and know when to call for help. It’s vital to establish what’s really important, is it turnover, or keeping down overheads? I know successful people who have a piece of paper with five key bullet points on their desk and it never leaves their sight

What other pitfalls are there? One thing startups tend to avoid is spending enough money on accounting and financial advice. The number of businesses that get into a real mess because they either don’t have any accounting or they’ve overcomplicated everything. There’s no point sending off 55 pages of impenetrable nonsense. You should be able to fit the main points on a piece of A4 with three sheets of figures behind it.

The other thing that tends to happen to those startups that do invest in accounting packages is they don’t actually question the figures. Entrepreneurs, generally speaking, are not that good at numbers – they’re better at marketing or falling in love with the product – so its usually worth having some around who can look and question.

The chances of an entrepreneur having the time or interest to do that is very slim. If startups don’t do this as the businesses unfold what you tend to see is firms going from occasional financial problems to regular difficulties. They end up constantly against their overdraft limit or can’t pay VAT, or have to renegotiate credit terms, and then they have a real problem.

It’s also very important, when it’s not just a one-man-band to put in writing a shareholders or partnerships agreement. It’s a simple process and, you may never look at it again, but you’ll be incredibly gratefully if things do fall apart.

Also getting the staffing profile right is important to ensure you have the right sort of people that you need when you mature. Sometimes you need to stand back and think ‘do I need a marketing man or a sales man?’

Is a good business plan also essential? Business plans are a real problem if you look at them in the wrong way. The thing about them is really they’re never going to be 100 per cent accurate and people get hung up on sticking by them when instead they should be thinking what they’re going to do about any shortfalls. A business plan should be seen as a fundraising tool and then a monitoring tool.

Are there difficulties specific to particular types of businesses? For those who work from home the main difficulty is that they’re unlikely to have much commercial contact, and are going to suffer a feeling of isolation, particularly when things wrong. The answer is networking, by seeking out people in same sector through training courses and seminars. With sole traders it’s also tough it is still important to involve someone else, even if it’s their accountant.

Family businesses tend to have a very specific set of problems. Often they have the wrong people doing the wrong jobs and there’s a lack of structure. Business matters go home and domestic angst comes to work. They tend to be blind to commercial realities and also tend to underpay, which makes them less competitive, so if they have to replace staff it comes as a real culture shock.

Getting good advice is clearly important but just how easy is it to find it? There’s definitely a gap in the market. If you go to you’re father’s accountant you certainly won’t get decent startup advice and neither will you if you go to the bank because they’re just not set up for that. Business Link and your local chambers of commerce are helpful but other than that then you’re looking at the big name companies. If you go searching on the net you’re just going to come across charlatans.

What about business mentors? Entrepreneurs want to do business, and use whatever tools they can find to do it. But they need someone’s who’s going to be questioning the implications of signing this contract or making that deal soI think a mentor is vital. However it’s important to find someone who isn’t judgmental and constantly referring to how it was done ‘in their day. And someone with a sense of humour. They need experience, but also a fresh outlook – gray hair and a young mind. If you’re going to get advice from a business mentor don’t go to someone who’s only worked in a large company because they won’t understand the whole process of starting a small venture.

How would you go about finding one? It’s difficult, they tend not to band together, or have a website. But if you talk to a range of people you run up against anyway, like your bank manager or accountant, that’s a good place to start, as is reading the trade press. And If you’ve come from another company think is there someone there that could help?

So many new ventures these days seemed to be funded on credit card borrowing, is this really wise? Funding a business on credit cards is very dangerous because it gets out of hand so easily. It really does leads to irresponsibility because at least with a bank manager, or a factoring company, there is somebody out there to tell you to hold back. It’s scary stuff, even with low APRs. Though you only have to pay off a minimum what happens when you can’t even do that and the amount you actually pay is one twentieth of what you owe.

Is it also important to plan how you’re going to leave your new venture? It’s like doing a business plan and a budget, you need to be working towards something. Even if you change that plan, there’s no harm in having one. Decide what you’re objective is. Where are you going? Very few businesses survive long into second generations.

What about the year ahead, how difficult will it be economically for startups? I think it’s a tough year. There isn’t gong to be recession but there are some real sector risks and regional differences, so there are all sorts of reasons why starting up will be hard. However, with enough funding, discipline, the right people and clear targets, there’s no reason a good business idea won’t do well.

Is the government doing enough to create the right sort of environment for new businesses? Not really. Red tape is a huge problem, employment law is a nightmare and tax gets more complicated. But there is a bigger government threat, from new insolvency regulation, which means Inland Revenue will be even tougher about collecting money they’re owed. An awful lot of startups tend to play fast and lose, about VAT and PAYE. This new legislation will make it much more difficult to do that.

But the thing that really is an abomination is how difficult it is to get government help. There are websites dedicated to how to apply for grants but it is still no easier. They come up with a good scheme such as the tax credits for R&D but make the process so complicated that no one knows about it. Even accountants don’t really know how it works. Great idea, awful delivery.

So, finally, if you had to highlight five basic points for startups to remember what would they be?

  • Always have clear goals
  • Remember that growth needs more capital
  • Never be afraid to hire the right people
  • Never do yourself what you know you do badly
  • Never be frightened to ask for help

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