A few weeks back, Rich Preece, VP, Accountants, QuickBooks, shared some of his thoughts on why around 50% of all businesses experience failure within the first five years of trading. In the second and final part, he talks through the importance of money when you start out in those critical first years.
Failure avoidance Suggestion #3: Know how you’re going to make money.
The last two points essentially boil down to money. This suggestion can be thought of like this – if you’re losing more money than you’re making every month, you don’t need to be an accountant to work out what will happen in the long term. Failure.
If you have a physical product, have you thought about how much it costs to manufacture it? What about distribution expenditure, marketing costs and so on? This is before we’ve even discussed how much you’ll charge for your product. You might think it’s simply about recouping your costs and adding a bit extra on top to stay profitable. However sensible this might seem, it completely ignores market conditions and how much your audience are willing to pay for your product or service. If your product does prove to be too expensive for your total addressable market, then does lowering the price still keep you profitable?
There are many questions that could be raised when discussing how to ensure profitability, but fortunately, there are a lot of solutions to help you.
Speaking to a financial adviser is a good way of having your numbers checked whilst receiving impartial and practical guidance. Another method is to use a financial management solution, which offer quick and efficient ways to build your own profit and loss and cashflow reports.
Failure avoidance Suggestion #4: Know how much money you need to break even.
The old adage of ‘you need to invest money to make money’ has never been more true when starting a business. Renting an office, hiring staff and buying inventory (or stock) can be massive expenses and there’s a good chance you might not get a return on that investment for up to 6 months. Its not all doom and gloom – there are things you can do to help get through this first phase. Set up the office at home if possible, and don’t move to rented space until you absolutely have to. Alternatively, there are a number of premises who can offer heavily subsidised leases on office spaces which could be another viable option.
In addition, to save on initial start up costs, think about employing talented friends who might consider a little equity in the business as opposed a short term salary. There’s a good chance that they will feel more invested in your business if they could greatly benefit from rapid growth.
Finally, seek out and work with those suppliers who will allow you flexible payment terms. This way you’ll be able to create an effective cashflow report that accurately tracks what’s coming in and what’s going out at the right time.
Of course, no one can give a definitive reason as to why half of businesses experience failure in their first five years. However, by considering the four suggestions outlined above, you will be giving you and your business a real chance of succeeding beyond your five years.