80% of UK start-ups will not make it past 18 months. It’s a sorry statistic. The main reason (c.40% of failures) is often cited as a lack of demand for the product/idea – “no market need”. That covers a multitude of sins but you may recall that some pundits loudly decried the Apple iPad as having “no market need” – which proves that sometimes markets can be created. The second biggest reason (c.30%) is insufficient capital (and if your bright idea needs a market making, you’ll need a lot of capital …like Apple has). The remainder of reasons for failure (c.30%) all relate to personnel, planning and direction.
I review a lot of startups and, in line with the statistic at the top, most have significant or terminal problems. If it’s not a go-er – which can be disappointing – it’s better to know before losing all your money, your family’s money and maybe even your home. However, some ideas can be made into realistic, workable plans through my planning process.
The first thing to critique is the idea. Is there, or can you create, a demand? Beyond the yes/no answer is the quantitative answer: how much can you sell? Never believe there is ‘no competition’ – the status quo is always the competition. Potential future customers are getting by blissfully unaware of your bright idea. The status quo is always the biggest ‘competitor’ and like all competitors, you need to know how to attract attention and sell against it.
The second group of things to look at are the people structure, capacity and processes, described in my Business Plans page. This is the design, the manual, for how the business will work and grow.
The final consideration is the amount of money you’ll need. Entrepreneurial optimism about this is equal to the optimism about demand. Just this week someone floated an outline plan for creating a business with £60K. £60K is a tidy sum of tax paid earnings to have accumulated …but it’s a drop in the ocean in business. You can start a business with £60K, or less, of course but it probably won’t be the business you had in mind. I have yet to, but would be pleased to, meet a startup founder with an accurate, evidenced figure for the capital they will need to achieve their goal.
Here’s a simple analogy: if you want to drive from London to Scotland you will need the right amount of fuel. If you only have enough fuel to get to Birmingham you won’t get to Scotland. Capital is the petrol of business so you either fuel for the full distance or accept a shorter journey and plan for refuelling with capital. Some entrepreneurs presume that as their business grows it will generate its own fuel. It takes rapid, immediate and substantial profit accumulation for this to be possible in a startup, which is very, very rare indeed. The truth is that as businesses grow they get more, not less, hungry for working capital. You may have heard this expressed as the warning ‘cash flow not profitability kills businesses’. It’s 100% true. You will need to build some ‘fuel stops’ into your business plan because lenders/investors take a dim view (read high interest rates, if interested at all) of businesses that ‘run out of fuel’ (cash flow crisis) and then go looking for capital. You’ll be a lamb to the slaughter.
So how do you work out the right amount of capital? Do not try to create 12 months of guessed profit and loss statements, balance sheets and cashflow forecasts. Unless you have a lot of experience in financial planning to be able to ‘jump’ to these stages, your guesses will be wrong. I’ve got a system for this which walks you through the first year(s) month by month, calling on you to think about who you will sell to and who you will buy from. My system will create monthly P&L statements from this. You then need to decide when payments for these transactions will occur – immediately? 30 days? 60 days? My system will generate balance sheets from this and show you how much capital you will need. The cashflow forecast is simply the difference in cash between balance sheet months. And there you have it: P&L, balance sheets, cash flow all connected.
Now… the capital figures that arise from this exercise are always a surprise. It is the point of discovery that you’ll only get to Birmingham, maybe only Watford, not Scotland. You have options: go back and adjust the month-by-month sales/purchase/payment decisions, or go get the right amount of capital. Optimism is no substitute.
One of my favourite examples of this, from 2017, is the second example in this story and their testimonial is here, they titled it a “Reality Check”. This business will likely join the 2% of UK businesses with annual revenues of over £1M in its third year. They’re not the only ones I have helped, with these methods, to achieve membership of the 2%, quickly. These are valuable businesses with excellent balance sheets and directors who have a very clear understanding of the causes and effects of their decisions.
If you would like to join the club, please contact me.
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