New business registrations always leap up in January. Whilst it’s understandable that a budding entrepreneur might want to turn over a new leaf in the new year it’s even more important that they start their new enterprise with their eyes and ears open, writes David Little, a Partner in our Corporate and Commercial department.
We do a significant amount of work advising entrepreneurs. It’s rewarding work. Equally when someone meets with us if their business is in distress invariably they are falling into a pattern others’ have trodden before simply because they weren’t sufficiently prepared.
For example insolvency figures released last month by the Government’s Insolvency Service show a 63% increase in corporate insolvencies compared to the same month last year (1,405 in September 2021 and 864 in October 2020). However they were 5% lower than the number registered two years previously (pre-pandemic; 1,480 in October 2019).
In October 2021 there were 1,248 Creditors’ Voluntary Liquidations (CVLs), which is slightly higher than pre-pandemic levels. The number of registered company insolvencies was similar to pre-pandemic levels, driven by this higher number of CVLs, although other types of company insolvencies, such as compulsory liquidations, remained lower.
The number one challenge they are struggling with relates to cash flow. Speaking to London Loves Business, Oliver Collinge, a leading restructuring and insolvency professional, from PKF GM says, “Cash flow pressures due to the well documented issues around higher inflation, staff shortages, increasing energy prices, supply chain challenges and the need to repay Covid incurred debt, is likely to lead to increased numbers of insolvencies over the next twelve months.
“These challenges will put multiple added pressures on businesses in the coming months, particularly those that weren’t in robust financial health before Covid, so it’s critical businesses act early and seek advice if they are struggling now, or think cash flow may be squeezed in coming months. The earlier they act, the more options they’ll have to continue trading and recover.
“For those businesses that are struggling, now may be the time to begin negotiations with landlords and creditors to develop manageable repayment plans. Will revenues be high enough to support your cost base? Will cash flows be sufficient to deal with the additional debt burden (both formal and informal) that has accrued during lockdown? Perhaps a CVA is something which should be considered or, where you may need to take the difficult decision to make redundancies to survive, consider applying for government funding to meet the short term cash impact of this.”
The second reason many entrepreneurs come unstuck is because they over estimate the market demand for their product or service.
To make money you need a market.
Do you have any competition? If no one else is offering the service, there’s a good chance there’s no demand for what you’re offering. Yes, without the mould breakers the world would probably still be without the internet, the iPhone or the Robin Reliant.
Do not overlook the value of thorough market research. You may well be able to see into the future, but it’s much easier to build a business where there’s already demand. Satisfy yourself by asking others that they agree with you that there is a need for what your offering and that they would pay for it.
Younger entrepreneurs considering a start-up might be tempted to partner with or hire their friends or family – people they genuinely like and would work well with. In my experience that doesn’t always assure success. For a business to be successful, it requires specific expertise and skills which complement the owner’s.
So my third and final pitfall recommendation to avoid is, from the outset, employ people with balanced competencies. If your business relies on software, you will need a technical expert to ensure the technology runs smoothly. Similarly the skills of running the finance, personnel and marketing functions will most likely need to be professionally outsourced.
You might think it’s expensive to hire a professional, but wait till you hire an amateur.
It’s not enough to know how much income you need on a monthly basis, forecast your whole business cycle, how inventory moves through your supply chain, and variations in seasonal income.
Prepare for the worst and you’ll significant improve your chances of success. Rather than relying on yourself, friends or family consider alternative sources of funding such as angel investors, business incubators, venture capitalists and business grants.
The above is accurate as at 09 December 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.