Why businesses fail....

There has been a big push for people to take up the torch of entrepreneurship and to start their own businesses. There are many good reasons for doing this, and some not so good but in the main if you have a good idea and a bit of backing you can make a good case for setting up a business. For most people in their first forays this is done on a small scale, setting up as a sole trader or a partnership perhaps testing the water and seeing how things develop. This is a perfectly good way of starting out. Taking on too much debt or other baggage initially can be a disaster so starting with something manageable and something that you can grow with and develop with and learn with can be a great start point. There are plenty of resources available to provide advice and support for the new business owner, but one area that they often miss out on is what can allow things to go wrong, and what can happen if it does. Of course, no-one wants to appear to be negative when you are taking those first tentative steps, particularly when there is such a push to get people thinking along these lines but these are important points and should be highlighted.

The biggest cause of business failure within the first twelve months of business is failure to control the finances of the business, either the income in terms of not bringing cashflow into the business, or the outgoings in terms of having too much money going out of the business unnecessarily. It can be an absolute nightmare trying to chase payment from people that you have provided goods and services to, particularly if you are offering credit terms to your customers as many businesses have to do, particularly in the business to business sector. It is also very easy to look at invoices as money in the bank, and to spend based on those figures rather than actually waiting till the money hits. This is even more of an issue if you are trying to run a business without reasonable financial backup when as a business you can be operating in a hand to mouth fashion. Having at least a basic understanding of business finance is absolutely crucial, certainly in terms of being able to manage day to day book-keeping tasks, invoicing, bill paying, the basics of payrolls and taxation, basic credit control and so on. You don't necessarily need a computer or any computer ability to be able to do this. Computers help, and save time as long as you know how to use them reasonably well, but before computers businesses ran perfectly successfully using notebooks, accounting books and all the rest involved in a manual accounting system, and that is still the case. Many people aren't that comfortable with computers, and if you are one of those, find another way that you are comfortable with, otherwise you won't be confident that you are getting it right, and mistakes will be made.

There are of course other causes of business failure, and I will cover those in more detail over the coming weeks, but in brief, relying on other people completely to run your business for you is generally a bad idea, as is trying to grow too fast, as is paying staff too much, as is not focusing enough on sales, or focusing too much on sales and not enough on fulfilling orders, but this finance issue is significantly more of an issue than most of the others. Having suggested that, the other area that isn't covered so much is what happens to a business when it does fail, and what the implications are for the business owner in that situation. The answer to this depends on how you have set up your business. If it is your first business there is a reasonable chance that you will have set up as a sole trader or partnership. In these cases you are personally responsible for debts incurred by your business. If, on the other hand, you have set up a limited company, you are usually not responsible for the liabilities of the business, although this may not be the case. Whichever way you have the business set up, failure can be devastating, and the earlier you get good advice the better. This is why understanding the finances is so crucial. As soon as you can see difficulties in paying bills or even worse, wages you need to get advice. Your accountant can help, as can your bank and there is good advice available online and through local business organisations such as chambers of commerce. Taking advice early can mean the difference between recovery and failure, so never be too proud to ask for help.