Around half of all UK start-ups fail in the first five years, while 64% are hit with unexpected costs in the first year alone. We look at ways that businesses can survive the early years and carefully manage surprise costs.
When Andy Carr launched his performance bike business, Spoon Customs, from the French Alps in 2016, he was quietly confident in his three-pronged approach to trading.
He knew his customer bases were in New York, Milan and London, so by targeting all three markets at once, and by setting up near his Italian suppliers, he felt sure to make a splash. And then the Brexit vote happened, the pound crashed, and his operating costs rose dramatically.
“As time went on, we realised that the extra costs were associated with trying to access those three markets simultaneously; despite giving us the cosmetically impactful launch for the brand we wanted, it would have stretched us too far,” says Carr.
The solution? Keep production and development in the Alps, but return to the UK and relaunch the firm a year later in Covent Garden.
“Thinking smaller and more locally helped us play to our strengths in our home market, and generate more for less,” says Carr. “It’s that willingness – which was reluctance at first – to change direction as situations change.”
As Carr demonstrates, monitoring outgoings and remaining flexible are essential principles that all early-stage businesses should follow.
“What gets measured gets done,” says Richard Tidswell, an SME growth consultant for the Business Doctors network. This includes disciplined 12-month budgeting and “spending time to properly consider what the operating expenses of the business should be, and then monitoring actuals on a regular basis, and investigating and resolving any variances.”
Tidswell recommends opting for cloud-based accounting services that make it easier to track and monitor expenses and profitability. “Get away from spreadsheets,” he says.
Processing customer payments may seem straightforward, but can hide nasty surprises. “While we knew the online web development costs would be high, I was most surprised at the high costs of processing customer payments, such as Visa processing charges,” says Andy Baxter, managing director and founder of Internet Gardener, now a multimillion-pound turnover business.
After monitoring the payments, Baxter shopped around until eventually choosing an independent website payment system, and using a merchant account separately from different banks.
“Thinking smaller and more locally helped us play to our strengths in our home market, and generate more for less”
Andy Carr, founder, Spoon Customs
“This allowed us to change merchant accounts as rates increased so we could obtain the best possible card-payment processing charges,” says Baxter. “Initially, these rates were around 2% of turnover; however, we’ve now managed to get this below 1%, which is a big difference.”
Like Baxter, Emily Bain is used to shopping around, and recommends negotiating everything with suppliers precisely because you’re a new business. “Don’t be shy, be brutal and use the fact that you’re a start-up and will give them loyalty as you grow,” says Bain, who co-founded Bain and Gray in 2009 with very little finance.
Meanwhile, on the delivery side, Bain and her business partner focused on invoicing promptly and keeping payment terms ‘strict’ with clients from day one. “You cannot underestimate how key this is to keeping the business running,” says Bain. “On our first deal, we asked the client to pay within 24 hours to help with cash flow.”
The firm also used invoice finance, which, despite having costs attached, enabled it to scale up much faster: “It meant we could move to the next level in our turnover and that was vital.”
Many seemingly ordinary start-up costs still come as a shock to first-time entrepreneurs. For the founders of Bain and Gray, this included registering the company and the domain name – outlays that are essential, but which neither founder had anticipated.
Failing to budget for rudimentary costs is commonplace among businesspeople, according to Dr Harveen Chugh, who teaches entrepreneurship at the Imperial College Business School.
“This could be things like VAT, permits and licences, or insurance – things you probably know at the back of your mind you might have to pay, but then you see the final figure and think ‘How much?”’ says Chugh.
And while these costs may be unavoidable, they can be better managed by ensuring you invest in a good accountant, says Michelle Wright, founder and CEO of Cause4, which advises organisations on fundraising strategies.
“Invest in a good accountant quickly to advise you on how to grow the business and to manage your finances cost-effectively. We still work with the same accountant we had from day one, and his knowledge of how we have grown as a business has proved invaluable.”
1. Network: You already have a network, so leverage it. Could friends or family members provide you with low-cost (or free) legal advice and marketing know-how? Now’s the time to ask.
2. Build your own website: Squarespace, WordPress, Wix – there are plenty of free or inexpensive website-builders out there. Start by building free dummy sites until you find one you’re comfortable with using and then sign up. The larger builders also have fantastic customer service agents on hand to help.
3. Negotiate: When it comes to quotes, three is the magic number – and don’t be afraid to let contractors know you’re asking around, either. It can feel awkward, but explain you’re a new business and ask for a discount. The worst that can happen is they say no.
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