How to avoid failure in your first year of trading

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How to avoid failure in your first year

The IoD’s Information and Advisory Service (IAS) recommends four fundamental ways to improve the likelihood that a new venture will make it through its critical early months

Getting a new business off the ground is an exciting time for any entrepreneur, but it’s a sobering thought that 42,000 of the 382,000 UK firms founded in 2017 didn’t make it into their second year, according to the latest data from the Office for National Statistics.

While some causes of failure will be beyond anyone’s control, there are some key actions that founders can take to improve their firms’ odds of surviving their first 12 months in business.

Write a bulletproof business plan

While this may seem obvious, IAS adviser Mike Matthews has found that not every founder who’s sought his guidance has written a business plan at all, let alone one that’s fit for purpose. An effective plan, he says, will cover the objectives of the company and its strategy for achieving these. It will contain realistic financial forecasts and describe where the firm’s products and/or services fit in the market too.

The plan should also serve as a clear, concise performance benchmark that you can easily refer back to during year one.

Know your market inside out

It’s vital to understand how competitive your products and/or services are likely to be before you launch them. Analyse what’s already on the market and judge your position relative to the competition. Thorough research will help you to refine your offering.

It’s important to prioritise your target market, because in most businesses 20 per cent of customers account for 80 per cent of revenue. Seek feedback from them and review your prices regularly to strike the right balance between profit margin and market share.

Keep the cash flowing in

It’s good practice to minimise overheads and keep a rainy-day fund in reserve to sustain the business through any rough patches. Start-ups should avoid borrowing constantly, but they needn’t be afraid of using small loans to fund specific projects.

No firm is likely to make money in its first three months. Operating an efficient credit- control system can help you to mitigate this. Avoid giving any customer more credit than you can afford, set reasonable remittance periods and chase up all late payments.

“It’s one thing to write invoices, but invoices don’t help your cash flow,” Matthews warns. “The important thing is receipt of funds.”

Take great care when hiring

Recruiting your first employee is one of the biggest milestones for a start-up founder. There is little room for error when your team is tiny – the entire income of the business might depend on the quality of the salesperson you’ll be hiring, for instance – so stay focused during the selection process on the key skills you want.

It’s also important to make your organisation a desirable place for talented people to work. Even a start-up can offer attractive benefits such as flexible working arrangements.

Once the team grows to a significant size, the founder’s role will change. You’ll need to become less hands-on and learn to delegate more, so that you can focus on strategic work that will keep your fledgling venture thriving for years to come.

How the IAS can help you

* The Business Information Service (BIS) is accessible by email (businessinfo@iod.com) or call: 020 7451 3100

* The Directors’ Advisory Service (DAS) can give guidance by appointment, either face to face at 116 Pall Mall or over the phone: 020 7451 3188

* The legal helpline can answer quick queries about a vast range of issues: 0870 241 3478*

* The tax helpline can give callers advice on both commercial and personal tax matters: 01455 639110†

* IoD members are entitled to 25 enquiries a year to the BIS; four sessions with a DAS adviser; and 25 calls to both the legal and tax helplines. For further details, visit iod.com/information or email businessinfo@iod.com

* Quote your membership number

† Quote your membership number and reference number 33337

Picture caption
Wringing the changes: unfazed by her invention’s initial failure to sell on QVC, Joy Mangano (portrayed by Jennifer Lawrence in the 2015 biopic Joy) turned the Miracle Mop into a multi-million-dollar product

About author

Sam Forsdick

Sam Forsdick

Features writer, Director magazine

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