It was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us. The words of Dickens from his Tale of Two Cities seem to resonate with the travails of the army of business start-ups charting their success.
In 2013 a record number of new businesses were set up in the UK. Moreover research has shown that 49% of start-ups began their venture with less than £2,000. Furthermore, 10% of start-ups required no funding. According to the Federation of Small Business, in 2013 small businesses accounted for 47% of private sector employment. Some 62.6% of all businesses were sole proprietorships, 8.9% partnerships and 28.5% limited companies.
Despite this backdrop some 1 in 3 start-up businesses do not make it past the third year. This is not such a tale of woe because some 67% of small businesses do go beyond that three year marker.
However, the $24m question to any new start-up must be, how can I position my business to fall into the 67% camp? There is a multiplicity of factors that contribute to the survival of small businesses. Despite a well exercised myth, small business survival often has nothing to do with endless access to bank finance.
Ten factors that can help a small business stay afloat are set out below. These are not listed in order of importance but in combination their presence or absence will be responsible for what Dickens said, “we had everything before us, we had nothing before us.”
- Profitable business model
- Clarity of income streams
- Business vision
- Knowledge of metrics
- Cash flow/financial management
- Market responsiveness
- Effective marketing and communication
- Access to finance
One may debate the dominance or importance of the 10 factors, which are by no means definitive. However experience and the history of small business success/demise has shown that one or more of these 10 factors are always in the mix.
Every business irrespective of size requires a profitable business model given the primary business objective is to produce a return for its owners. Small business owners must have a business model in place such that when all the inputs are combined and the output sold a profit is generated. The ideal would be a profit in year one but the realisation of profit will be dependent upon the business and its financial reserves. However, as a benchmark a micro or small business should be seeking to realise a profit by the end of year three. In the absence of a clear business model any prospective business owner is merely burning money in a reckless manner.
What are the income streams of the business? This should be crystal clear from the knowledge of the business model. For most small businesses its core activity will be the primary income stream, this may be supported by one or more secondary or passive income streams. A dance school may generate its primary income from its dance classes but it may generate secondary income from its dancewear. It is important that existing and prospective small business owners know and can clearly identify their income streams.
The other factors will be examined over the coming months.
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David Frederick FCCA
Principal Marcus Bishop Associates
Chartered Certified Accountants