Retail and Wholesale
This article is part of our collection on Leadership and Management
We asked experienced SME owners to flag up what they saw as the biggest dangers to ambitious young start-ups, and their top tips to overcome them.
Last updated: 26 Jun 2019 6 min read
“This is where most businesses fail,” says Chris Sheppardson, serial entrepreneur and CEO of thought leadership and knowledge-sharing specialist EP Business in Hospitality. “It can strangle even the most successful of businesses, and often one of the ironies is that the greater the sales and growth, the greater the issue – because growth drains cash.”
For Sheppardson, cash flow became an issue in 2009, when the economy took a nosedive. “We had breezed into growth year after year, when suddenly the market stalled and for the first time we faced a new battleground as our cash position declined,” he says. “It was a genuine shock, and I wasn't mentally prepared for it.”
For most businesses, cash-flow challenges are more likely to arise in the first few years – but it pays never to take your eye off the ball. As Sheppardson points out: “While every entrepreneur tends to have blind faith in what can be achieved, the truth is that everything will take twice as long as they imagined and cost twice as much.”
Top tip: “The pragmatic way to test your business model is to look at your sales forecast and double your costs.”
Alex Lyles, co-founder of resort-wear trade show Splash Paris, says that you risk creating a shaky team the second you hire your very first employee. It’s not necessarily because you’re about to give the job to the wrong person; it’s more that you haven’t really thought about how you want to run your business.
“[Co-founder] Claire [Spencer-Churchill] and I had both been employed in agencies previously with very rigid working hours and no real flexibility,” she says, “so we made a conscious effort not to have an impersonal approach. We also knew from setting up our other business, Claret Showroom, that to retain good staff it’s imperative you listen to them and their needs.”
“Understand your business ethos, and hire like-minded people who are passionate about what you do”Alex Lyles, co-founder, Splash Paris
When they recruited their first team member, says Lyles, they were clear about their business objectives and where the employee would fit in. “We also made sure we let them know that they could openly provide suggestions about business matters so we could discuss and debate as a team,” she says, pointing out that one of the main benefits of launching a start-up is that you’re very well placed to forge meaningful connections with your employees.
Top tip: “Understand your business ethos, and hire like-minded people who are passionate about what you do.”
Since 2015, London-based Air Agents have been helping to manage Airbnb properties for corporate clients and individual owners, and co-founder Fran Milsom says it was after about 12 months that their first major contracts started to come through. “Our knee-jerk reaction was to immediately hire and build up the team, which was a risky tactic, though thankfully we had enough cash in the business,” he says.
When a big deal is on the table, Milsom maintains that it’s important to hold off the celebrations and to analyse the potential revenue and costs instead. “Your cost base can increase significantly, but revenues don’t begin to come through for some time,” he says. His own solution to Air Agents’ first big win was to split out the profit and revenue associated with that contract from the rest of the business. “At the same time, we placed real focus on growing existing, smaller contracts,” he says.
Top tip: “Never try and win a contract if you don’t believe you can fully deliver on it. And always go into a contract discussion with one eye on the ‘what if?’”
SME owners often struggle to ‘let go’ of key tasks as their company expands, and the thing that Nigel Davies, founder of digital workplace software company Claromentis, often wishes he’d outsourced a littler earlier is accounting. “Warning signs for a small business are errors being allowed to accumulate and a lack of tight credit control, allowing receivables to stretch,” he says. “Before long, the canned reports in the accountancy software bear little relationship to the actual business position.”
He agrees that software can help automate a lot of the processes, but suggests that once you have around 20 active customers, things can easily go awry. “As that number – and the complexity of working in multiple foreign currencies – begins to grow, the understanding of the true financial position of the company can spiral out of control,” he says.
Top tip: “Watch out for the tipping point, which is likely to be around the transition from a micro company to a small but viable one. This is when you need to outsource to a highly recommended bookkeeping firm who will take ownership of all of your accountancy tasks.”
“Culture is often overlooked,” says Tim Thomas-Peter, co-founder and MD of Ambidect, which specialises in e-learning platforms for business. “People think it’s just for larger corporations, but I’ve found that if you ignore it, it happens anyway – and it will be totally out of your control.”
The resultant ‘culture chaos’, as he calls it, means that different departments often operate in conflicting ways. He cites the case of a company he once did some advisory work for who were always very busy but making little money. “I found that the operations team was striving for total technical excellence and first-rate customer service, while the sales team were being driven by how many contracts they sold,” he says. “So, as you can imagine, they were driving prices down as low as possible.”
Had the culture been properly defined and technical excellence singled out as the key to everything the business did, Thomas-Peter says it would have followed that the sales team then sold this at a premium.
Top tip: “If things have gone sour, talk to your people. They’ll more than likely say, ‘Thank goodness you’ve spotted it, too.’ The solution will come out of the whole team’s involvement.”
Leadership and Management, Strategy and Planning