QUESTION: A lot of new businesses seem to get into trouble in their second or third year. Is there a reason for this, and can I avoid it happening to me?
ANSWER: It is necessary to split this answer into three distinct, yet related areas.
GET REAL AND STOP BEING SO POLITE
BEING in business is a culture shock for many. Some don't even notice they are going to have to change until it is too late. What I mean by this is that in life, we are guided by the system. Parents tell us what to do and how to act, then teachers and of course we all live in a world bounded by rules and regulations enforced by the law or religion and morality.
And a jolly god job too, for the bulk of the population. This necessary orderliness can lead us to believe that people in authority or in general are to be believed and must be right because they are a banker or a solicitor or an accountant or other specialist or person of 'importance '.
Being too nice is fine in life, but not always in business. You must question everything, ask yourself what the other person has to gain or lose. Do not be afraid to ask them to explain, or to drop their price or to even do it for you! Don't be too NICE. You've got to hustle! Even customers prefer realistic straight talkers who understand the jungle. That does not mean you have to abandon your integrity nor stop being nice in general, just be more guarded.
TAKE EVERY POUND PRISONER - TAKE MONEY SERIOUSLY
This is difficult for entrepreneurs - they risk money and could not do so if they were miserly. Find the balance. Capital, the money you first use to start your business is like a seed.
The whole purpose of being in business is to grow capital! By making profits we add to our capital and what ever else you do you must make profit.
Even if you were to put £10,000 in the bank, you would earn interest. You must at least beat that by investing it in a business! The difficulty here, is 'knowing' whether you are profitable and, indeed, how profitable. In the first year it's usually possible to guess that you are in profit simply by keeping transactions in your head or monitoring how much you have in the bank.
By year two or three, your business has become more complex and others are now involved. Measuring profit and co-ordinating an efficient operation requires systems.
You don't guess how fast your car is going - you use a system, an instrument to measure it called a Speedo. So why would you guess whether you are making profit or not? Get a computer and some basic systems, so you know for sure! Alternatively, trade for cash only, carry no stock and use your bank account as the P&L - oh and don't eat that week if you make no sales. Not very realistic!
TIMING - CASH IS KING. TURNOVER IS VANITY, PROFIT IS SANITY
Many new businesses don't realise that the more successful they are at selling and distributing their product, the more cash they have tied up. If someone buys from you, say £2,000 worth of goods, they will probably expect 30 days' credit - which in fact usually ends up at 60 or even 90 days.
You've 'lent' them, interest free, £2000 for 30 or 60 days. Worse, next time they buy £4,000 worth so the more successful you are the more cash you have tied up. Sure, you too may have received credit from your supplier, but balancing the debits and credits is surprisingly difficult to manage.
Some customers may not pay you at all! You may have to pay workers immediately, whilst you yourself wait to get paid. You probably will have to carry stock to ensure that you can meet their delivery dates! Ever tried paying the rates with stock from the shelves?
All this gets more complicated as your business grows and so needs managing. Capital needs to be preserved and increased to fund this cashflow merry-go-round.
Issues like this are faced by millions of business people every day so you should not be put off, just be prepared. Simply seek free advice from Business Link and others, then get someone to help with profit and cash management - it's worth it!
Don't rely on your accountant. Whilst he or she will be essential to guide you initially, accountants cannot run your business for you. Get them to start you off but insist on filling in the numbers yourself.
So, start that business. I wish you all the very best for 2004 and I leave you with a few pointers to what makes an entrepreneur.
If you believe you are always right; if you dislike being one of the sheep and prefer to plough your own furrow; if you are amiable and sociable; if people gravitate towards you and your ideas; if you are not miserly and understand that money in itself is useless and if you like to take calculated risks, having often been right in the past, then you qualify as an entrepreneur.
Oh, and remember, if you can win orders, everything else is possible!
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