This blog post was written by guest blogger Jeremy Edwards, Independent Financial Adviser & Expert.
No one ever goes into a new business venture expecting it to fail, but almost all successful entrepreneurs will have a few war stories to tell. In the USA, the war stories are part of the mystique of being an entrepreneur, but not so much in the United Kingdom.
As an independent financial adviser, I spend quite a bit of my time persuading business people to manage “the downside” a little more, so if the worst happens, it is not the worst anymore. So how do you plan for success but manage failure if it comes to bite you?
The first thing to realise is that failure is the usual outcome for new businesses; reliable statistics are hard to find, but it would be a fair summary that more than 50% of new businesses will not survive the first 5 years. Understanding that means that mitigating failure is very important; you need to be able to dust yourself down and start again, without wallowing in excessive self-pity or ruining your chances of picking up the bits and making a better go at it the next time.
Ring-fence failure; use a limited company structure wherever possible. If you cannot use a limited company, then look at a Limited Liability Partnership. If this goes wrong, your losses should be limited to your investment into the business and not extend to your entire personal assets. Do not give personal guarantees to banks or finance companies unless absolutely necessary; you want to be able to walk away, without having your pockets picked after your business failure.
Develop a good management information system; most people will automatically think of financial accounts, but it should be more focussed than that. Measure what needs measuring; isolate what metrics have real meaning in your business. Vacancy and rent arrears are vital for a landlord, covers served are the same for a restaurant. For an accountant it is likely to be billable hours, but do not measure everything, life is too short and it does not generate income directly.
Manage your cash flow; more businesses fail because they run out of cash than any other reason. Too many people chase turnover rather than profit, so fail to collect enough cash to make the business self-sustaining. As part of this, remember your credit control; a “customer” who is taking your product but not paying is not a customer, they are a drain of your assets and sanity. Cut them off quickly before they drain you of your lifeblood and make them move on to leach off someone else.
Manage your personal investment; good investment is diversified; by all means back yourself, but make sure you have some “running-away money”, by having some cash and investments outside of your business. If you have surplus cash in the business, draw it out as a pension payment; if you put more money into your business, use a loan structure, so you can get it back.
Manage your own health and welfare; being the richest body in the cemetery is a fool’s errand and no dying person I have ever met has wished they had spent more time at work. In the UK, business owners and directors are the only workers that are allowed to work themselves to death, as there are no labour laws to protect them. Although being your own boss can be liberating, it is all too easy to be a busy fool, doing lots of things but earning nothing.
Manage your time with your family; if your dog does not recognise you, then your family relationships will also be bad. Divorce will wreck any business success you have, so keep communications open and keep family time clear.
Keep your personal networks open; being a business person does not mean you can become a hermit; you need to keep your social and professional networks functioning and develop more contacts. Each contact is a potential customer, business advocate or sounding board. They may be able to open doors or fix problems for you, so have the confidence to ask.
Surround yourself with good professionals; no one knows everything, so find yourself a good source of the information you do not know yourself. In the UK, the Federation of Small Business is a good place to start, but there are lots of sources of good business support, from trading terms and conditions, employment contracts to accounting, HR and legal support. Unfortunately, price is not a good indicator of quality, so be wary of people who promise the earth for modest monthly payments and then get evasive when you actually need something doing. Conversely, just because it is costly, does not make it good; you may just be a fashion victim!
Make decisions; as a generalisation, doing nothing can be more damaging than doing the wrong thing. If your business is not working for you, then change it, do not wait for the environment to change.
If you have to close your business, do it while you can salvage your assets and preserve what was good about it. Hanging on for grim death, will leave you with nothing but regrets.
Like so many entrepreneurs, Jeremy has been on the wrong side of a business failure, when his data and communications company failed in 2004. Although the order book was healthy, there was no equipment available from Australia and no alternative path. He and his wife wrote each other redundancy notices, together with the rest of the staff.
Dusting off his accountancy qualification, he did interim posts until moving into financial services, where he completed his compliance qualifications, before becoming an adviser in 2006.
To contact Jeremy click here.