Start-ups

You’re probably thinking, “Oh no, not another one of those ‘why businesses fail articles’”. This article is certainly about why businesses fail, but this one is looking at the issue from a slightly different point of view. You see, the pandemic, for all its downsides, affords us a view of business issues from an accelerated lifecycle perspective. As an accountancy practice in London, TaxAgility we’ve learnt a lot over the past year.

In just a short space of 12 months, businesses have been hammered by a range of common issues one might not expect to see all at once during the normal lifecycle of a small business. At least not in such a short space or time, or as a result of a cascade of other business related troubles.

For instance; it’s common for a business to fail because it experiences cash flow issues, or the loss of a major client, or staff turnover, problems or supply chain issues, or reduced seasonal footfall, even the occasional export/import issues. In recent times though, some businesses have experienced all of these, all together, as a result of both pandemic issues and the fall-out from Brexit impacting European supply routes and trading partners.

In a normal business lifecycle, all these issues can surface from time to time, sometimes over many years, and many can be weathered if handled competently. However, the global pandemic and Brexit have effectively put many businesses in a lab test tube, exposing them to a variety of tests within a short space of time. Many business owners and entrepreneurs have struggled with this. Furthermore, many more mature businesses have found that their business models simply cannot weather this type of storm.

While it’s easy to simply blame the pandemic or even Brexit, for some, the reason the business failed is not just because of these two protagonists. It’s likely that the business was already weak due to several other non-visible issues. The pandemic and Brexit have acted as a catalyst and exposed an underlying complacency in the way business has been done up to now.

Check out our articles on:

• Managing risk in business and,
• Tips for weathering a business crisis

Complacency in business is a killer

It’s important to be clear here, there’s no suggestion that a business fails because the operator of the business is sat twiddling their fingers or just counting the cash coming in. That’s not what we mean by complacency. Complacency can be as simple as working hard to meet business goals, but without acknowledging that the markets are changing around them. It’s a case of being overly ‘self satisfied’. The root cause can often be attributed to fear – fear of change, fear of upsetting what appears to be working. Under such circumstances a business owner simply convinces themselves that all is okay, rather like looking in a mirror and only seeing what you want to see.

The problem could best be exemplified by what has happened to the High Street, particularly larger stores. Such stores rely extensively on foot traffic, so when this dried up during the pandemic, so did cash flow. Some did have an online element to their business model, but not enough to support the operational cash requirements of the business when regular footfall derived income fell away.

Competitive business models will erode your primary revenue sources

You might be thinking that it’s a little harsh to criticise stores for not foreseeing something like a pandemic. The reality though is that more and more business is being done online, the trend is clear and some businesses simply haven’t adopted this extensively enough or quickly enough. Of course, it’s harder for some product lines to adapt because of the need for consumers to interact directly with this products. But not for all though, especially consumer electronics, many leisure items, regular domestic consumables and many others. Even retail apparel, although harder to manage online, is destined to increase further.

Buying without fist seeing a product is far from new. Mail order has been around since the 60’s – the 1860’s!  The first mail order business was formed in 1861 by Welshman Price Pryce-Jones.

Another famous clothing and fashion related mail order catalog, Grattan, started life in 1912 and became very popular in the days prior to the internet, along with Littlewoods, Kays, Freemans, Marshal Ward and Great Universal Stores. Much has happened to them since the internet revolution. Most have either been acquired or evolved, with a web front being a major part of their business model. Take Littlewoods for instance. After merging with Great Universal Stores to become Shop Direct in 2003, very.co.uk was launched in 2009. They pride themselves on consistent reinvention. Check out Very’s story here.

Retails stores have been popular because people like to go out and shop. Will this continue? Probably. However, the population has now had an experience like no other and along with other pressures, such as the parking ordeal many towns now represent for those driving, and Covid’s likely legacy, the attraction may wane. The point is, alternatives exist, business models evolve, consumer appetites are fickle and popularity can change in an instant.  If you don’t have a Plan B, then beware. In fact, if your Plan B was the internet, it probably now needs to be Plan A.

Innovation, make it part of your company’s culture

Innovation is central to a business being able to keep up with the fast pace change we see in today’s consumer markets. We believe that for a company to be truly successful, innovation must be part of its culture. Just like Very. If it isn’t, employees and key management are likely to get complacent, because they are on the same tread mill everyday, with little motivation to explore new ideas and way to better serve their market.

Of course, we recognise that most companies have an eye on where their markets are going. More often though, the changes they foresee are not necessarily seismic in nature. Often they represent new product or service derivatives – more subtle shifts, as opposed to something that represents a completely different way of working. The latter represents more of an environmental response. Environmental pressure is the most likely catalysts behind evolution – not just in nature, but in business too. Nature is a great teacher.

Innovation should be a key focus area for a business’s management, not just product or service improvements, but also environmentally, in how markets and consumers are reached, engaged, and fulfilled in response to changing attitudes, technologies and needs.

It’s not just a case of, ‘lets get online’ either. That ship has sailed, so to speak, as every business should have an online aspect to their brand. Innovation online today requires thought around user experience, and how to create a better ‘experiential’ dimension to a user’s journey.

Complacency is behind many of the commonly associated reasons for business failure

The following represents a list of some of the most common reasons why a business fails.  There’s nothing new in terms of the reasons. However, if we look at these with a somewhat different eye, it’s not hard to see the part complacency plays.

1. No viable business or marketing plan

The business has been set up, undoubtedly with good intentions and a vision, but without any form of business planning – basically, on a ‘wing and a prayer’, because the person behind it believed totally in what they were doing, perhaps even disregarding what others were saying or what the market indicators suggested.

A business plan is meant to take a good look at the realistic requirements for a business to achieve success, the resources required, and timescales. It should also look carefully at contingencies given associated risks with the target market. For instance, what would happen if first sales don’t come within the planning timeframes? How much cash would the company need to cover the deficit and how long could it survive before sales revenues begin to appear?

Excited entrepreneurs can often cast risk to the wind, believing firmly in themselves and ignoring sage advice or overly satisfied with early encouragement from prospects. How often have you heard a potential prospect, lavish praise on a new product you are trying to sell, provide endless encouragement, but then not buy.  The danger is that a business owner can believe the hype over reality and become overly self-satisfied in the strength of the product and market acceptance. In other words, complacent belief in success, despite other possible waning signs.

As a small business accountancy firm, we are always surprised how often we find businesses that run in to problem for the simple reason that they either don’t have a business plan (or marketing plan). Don’t make this simple mistake, it’s business 101.

2. Lack of a strong value proposition

Similar in nature to lack of a business plan, not having a strong value proposition clearly articulated and tested, can stem from over confidence gained from an early interest in a product or service from friends and family eager to boost egos. Ultimately, only your target audience really matters and early affirmation of product viability through market research should replace friendly encouragement as the basis of the business. Put simply, does the market actually need your product and do they buy into the value it professes to offer?

3. Lack of cash

A fundamental mistake many new small businesses make is to run out of cash. They just get the numbers wrong. Again, it’s usually due to over confidence, over estimating revenues, underestimating timescales and underestimating costs.

Few plans ever go to exactly to plan, there are always hiccups and unforeseen problems. How well you have built contingencies to cover the costs of these ‘problems’, will determine how likely you will survive if a problem becomes extended and starts eating into cash. A common cause is simply due to revenues not arriving to plan. This is almost entirely out of the hands of the business, unless it’s secured early orders, but once they have been fulfilled, ongoing revenues need to happen quickly.

As we saw with the pandemic, it’s likely the vast majority of small businesses would not have survived unless they were given cash lifelines – either loans or help to pay salaries. However, few could have foreseen the extent of the crisis and there’s still an uncertain future, as many business still don’t know if their markets will return to a level that will support their operational cash flow needs.

As accountants working with a variety of small business types, our tip is to at the very least spreadsheet your cash flow workings, be realistic and brutally honest with yourself – look at worst case scenarios and build up from that. Do this regularly too, especially if circumstances change.

4. Over reliance on a few large customers

It’s a nice feeling, having a couple of really great clients feeding your cash flow each month. For some business owners, such reliance would make them feel distinctly nervous. However, for others, especially those who have a great working relationship with their clients, perhaps are even friends, complacency can set in.

TaxAgility Accountants also works with its clients as business advisers, and businesses with a heavy reliance on a few major clients is an all too familiar pattern, especially with smaller or niche clients.

The problem is that you may never know there’s a problem with a client until it’s too late. When a business gets into trouble, it can be tough for a business owner to admit this to themselves and take action early. Also, because pride and ego play a part, a troubled business owner may not let his clients or suppliers know. Ultimately, the troubled business stops paying its bills, leaving your business looking at a write-off. As time ticks on, complacent business owners realise that they may not be able to fill the revenue gap quickly enough, as new business development can take a lot of time, especially for specialist or niche products and services. If this isn’t reconciled quickly, cash flow problems arise and that company’s ability to pay its debts leads to insolvency.

The answer here is to always have more clients that you actually need to make a comfortable profit margin. Don’t let a few large clients dominate your cash flow security.

5. Taxation oversight

Tax is a complex discipline, made worse where issues such as overseas VAT is concerned. Always get specialist advice, especially now we are post-Brexit and the situation with the EU is far from clear.

Don’t make the mistake of simply assuming you don’t have to pay taxes.  Or indeed, that the country you are doing business with won’t demand tax is deducted until you can prove where your company is domiciled, can be simpler said than done. There’s a heavy focus by governments at present on taxation as applied to digital products and services.

Having a chunk of change removed from your expected invoice payments, because a clients obliged to hold back tax payments, can cause serious cash flow issues.

Tax advice and tax planning are key services TaxAgility provide. It is a complex issue, so take good tax advice if you are in any doubt

6. Dependency on key staff

Having people you can trust in key positions within your business is a great help and a boost to confidence, in that you believe somebody ‘has your back’ and is working with your’s as well as their own interests at heart.

However, one can get complacent and start ignoring the warning signs that all may not be well with your ‘partners in business’, or indeed people you rely onto get fundamental aspects of the job done. Circumstances might arise where a key person becomes incapacitated or unreachable on holiday. Business may become severely affected. Worse still is the prospect of effectively being held to ransom by a key skill bearer who suddenly decided that they are unhappy.

People are naturally defensive where sharing aspects of their work is concerned. For some, the thought that they could be replaced is unbearable. At some point the “you couldn’t do this without me” syndrome becomes a clear and present danger to the business, especially if the individual concerned is a key member of the team.

Always ensure other people can cover the roles required and, make sure this attitude is part of the company culture and embraced by all.

The other concern with dependence on key staff is the potential for fraud. It’s a subject of its own. We have an article on small business fraud here.

When people believe they have your complete trust, some may take advantage of this, or find themselves pressured in exploiting your trust because of negative personal circumstances. Don’t get complacent, review your relationships and levels of trust within the business regularly, so you can spot the warning signs.

Final thoughts

When it comes to the main reasons why businesses fail, there’s nothing new under the sun, as the saying goes. However, what recent events have taught us is that the catalysts for failure can be different to what we might normally be used to.

Is what we experienced recently just a ‘one-off’? An extraordinary event? Possibly. But, consider the pace of change we have seen in other areas of business over the past few years, such as new technologies, significant growth in internet enabled businesses, and the need to adapt to fast moving consumer / client trends as they adopt different buying or working practices. Such changes point to a future requiring businesses to be far more innovative and adaptable, not taking their client base for granted and definitely not being complacent in their day-to-day operations and outlook.

If you are concerned about the issues your business is facing, act today. TaxAgility accountants provide specialist accounting services for small businesses. We’re based in Richmond and Putney, but serve clients throughout London and the south east. Contact us here.

Why not check out our series on building a better business here.