Starting a new business is a decision hundreds of thousands of people take each year, often with very real sacrifices being made. It takes a lot of courage to do so, and so it’s a real shame that we see so many fail for what are simple misjudgments and poor planning, especially where funding is concerned. This is where the Adjustment Agency can help.

There are around 5.3 million small businesses in the UK, which represents 95.5% of all UK businesses. In 2021, over 800,000 businesses began trading. These businesses are often micro entities with between 1 to 9 people onboard. 

It’s very easy to start a new business in the UK. But what is not so easy is funding it and putting the right strategies in place to ensure it grows and makes a return for the initial investors. 

Many businesses fail within their first three years, around 60%. The reasons for this failure are very often avoidable if caught early enough. Underestimating funding and failure to challenge the business plan are two key areas that the Adjustment Agency can help with.

Early funding sources

Many start-ups are funded by what is commonly referred to as the 3F’s: founder, family and friends. In many ways, it’s a soft approach to funding, as the business founder may not experience anything like the pressure a traditional funding source may place on a start-up, such as contracts, shareholders agreements, business plans and cash flow forecasts. However, in many ways, 3F’s funding carries greater consequences, as a founder risks damaging close and valuable relationships. 

A common theme we see in early stage businesses, is underestimating both funding requirements as well as the time it takes to achieve results. We also see the same issue in larger more established businesses. 

As a rule of thumb we often use the approach of doubling the estimate for funding (and time too). It’s often apparent that new business founders, while understanding basic costs to get going, fail to understand the cost associated with maintaining a business while it is waiting to make a profit. And a healthy bank balance is generally needed to satisfy the working capital demands of growing companies.

Generating early revenue is critical, however, as the saying goes “turnover is vanity and profit is sanity . . . BUT cash is king!” This underlies the fact that most companies do not go out of business because they are making losses or have insufficient profits, but because they run out of cash.  Indeed a number of high growth companies fail because they run out of working capital.

Why do businesses underestimate funding and run out of cash?

We see a number of basic reasons for this:

No business plan

Many small and medium sized businesses do not have a plan.  Planning is a fundamental necessity for all businesses.  The plans often do not need to be long or particularly detailed, but having a plan provides direction. Most importantly, if funding is sought, a business plan clearly describes what the business is, why the business exists and how it plans to succeed and the assumptions behind it.

The business plan is based on unrealistic estimates and assumptions.

It’s natural to be cautious when planning the financial needs of a business. After all, one wants to show diligence in such matters when presenting the plan to potential backers. However, building in contingencies is a natural part of estimating risk. This shows greater diligence, even if you end up asking for more money that you appear to need on the surface. Many businesses err on the side of caution with their estimations and assumptions. Often this has the opposite effect to that intended and leads to underfunding and failure.

Other examples of unrealistic assumptions we come across are being over optimistic on the time taken to start generating revenue and subsequent growth rates.

Afraid to ask for too much money

A common experience in the world of funding small businesses is finding out that a funding request is too small.  Not because the funder thinks you are asking too little, but because they seek to make larger investments for larger returns.  In addition the cost of the funder’s due diligence is relatively fixed, so it can be uneconomic for them to get involved in smaller propositions.

For many small businesses, it can be better to ask for too much than too little, at least then you may get heard.

Failure to adjust the business plan as a working document

A business plan is a working document and not something to be hidden away in a file and reviewed once a year. Its assumptions and expectations are going to be tested regularly as the business unfolds.

The army has a saying that no plan, however impressive, comprehensive and thorough, survives first contact with the enemy!

In our view, there is a parallel with business - in this volatile, uncertain and constantly changing world, it is essential to expect the unexpected and accordingly the plan needs to be regularly updated.

Getting past go and the need for contingencies

A startling fact to consider is that around 20% of new businesses fail within their first year. However as noted earlier, around 60% have failed within three years. Many fail for the reasons we have outlined above.

A key factor in surviving in today's current environment is having contingencies.  We suggest that small and medium sized businesses have at least 3 contingent sources of funds should the need arise.  In our experience one or more of these sources of contingency funding will fail for whatever reason, and therefore businesses should not put 'all their eggs in one basket’.

Challenge your business plan

The owners of early stage businesses are often passionate about their companies and the opportunities they see.  In our view it is vital that there is a robust challenge to the business model of such companies as the failure rate of early stage businesses is unacceptably high.

By way of an example, some early stage companies are able to develop intellectual property.  In our experience many smaller businesses are simply not aware that their ‘know how’ can be protected in order to stop competitors from copying their expertise.  Examples include patenting an invention and registering trademarks and designs. This can prove to be very expensive, particularly if worldwide cover is required.  In some instances partial funding can be obtained from national and regional innovation agencies, and the intellectual property may qualify for research and development tax credits.  

How the Adjustment Agency can help early stage businesses

The founders of many small businesses have incredible levels of drive, passion and enthusiasm. It takes a lot of guts to start a new business, especially if it’s your first new business and one where sacrifices have been made to get things going. However, no amount of passion, drive and enthusiasm can replace pure experience. 

It’s common to find the founders of new businesses believing that because they have spent countless years working in other established businesses, that it’s a simple matter to step out and run their own. Having a career and running a business are two very different animals and a situation where an adjustment in thinking and action is essential.

The Adjustment Agency benefits early stage businesses by providing objective assistance to the founders based on years of experience with similar businesses. We understand the reality of their position. We know where the mistakes are usually made. Most importantly, we understand why the mistakes are made and the adjustments to thinking and action  that are necessary to get past Go!