Considering that 20% of new businesses fail during the first two years, 45% within five years and 65% within ten years, business owners have constant challenges. However, the idea that having survived the start-up stage means that you are “on the road to riches” is a dangerous attitude. In reality, there are various stages when switching your company from start-up to growth. As they say, fail to prepare, prepare to fail. It really is as simple as that.
We will now look at the various issues to consider when switching your business strategy from that of start-up to a growing business.
Setting foundations as a start-up company
While the first two years of business are often seen as the riskier, they also play an essential role in creating the foundations for the future. Therefore, before you even consider moving to the start-up stage, it is crucial to ensure that your business idea is viable and potentially profitable. Of course, in reality, you won’t know until you begin trading, but there is enough market research and expert guidance available to give you a good idea.
Test and adapt your business idea
Before moving towards the start-up stage, it is important to test and adapt your business idea. This will likely involve advice and input from an array of different people giving you an unbiased opinion on your concept. At this stage, it is vital to listen to what others are saying, what they see and what they think about your business proposition. Failure to listen at this early stage, could cast serious doubts about your ability to move to the start-up stage. Of course, there is nothing wrong with being confident, indeed having an ego, but don’t be blinded by your own brilliance!
Secure finance for your start-up
It is vital to have a detailed plan in place as you move towards the start-up stage, focusing on what needs to be done, the finance required and the employee/management team. The key to a successful start-up is access to the right level and type of finance. While important not to spend just for the sake of it, there is more risk in underfunding your project than overfunding. Unless you provide the nourishment in terms of finance, your business idea is unlikely to prosper.
Different types of finance available
While no two businesses are identical, the same can be said of the most suitable type and level of finance required. Thankfully, there are numerous sources of finance for start-up companies that can help create solid foundations on which to build. These include:-
Well-structured affordable business loans will provide the required liquidity to kick-start and then begin to grow your business. Many of us have a natural tendency to take out short-term finance, so this can be repaid as quickly as possible. However, when it comes to business, it is essential to keep one eye on cash flow and leave yourself some headroom in the event of unexpected expenses/trading difficulties. Therefore, it is more prudent to consider a business loan with a longer duration which allows you to repay early if the cash flow is available going forward. If the business takes longer to take off, you can use the entire duration to protect cash flow. Simple?
When acquiring machinery and equipment, balancing the cost against the productivity/efficiency gains is vital. Many young companies use asset finance to protect cash flow while maximising their output and ultimate profitability. It is also essential to consider the maintenance of the machinery and whether there may be more significant financial benefits in acquiring second-hand equipment.
Even the term venture capital can strike fear into the hearts of many business entrepreneurs looking to protect their “baby”. The reality is that not only do venture capital companies offer potential investment, but there may also be add-on services such as management advice. Don’t forget that most venture capital personnel have been there and done it in the world of business. They can offer you invaluable guidance when switching from the start-up to the growth phase. Yes, they may drive a hard bargain, but it is crucial to consider the financial input and the advice/guidance available.
When comparing angel investors to venture capital investors, many people automatically assume angel investors to be less business-minded and likely to take a “softer” approach to investment. Do not be fooled!
More commonly, successful business entrepreneurs, Angel investors have been there, done it, and earned their money. This tends to be a more intimate business relationship, often involving one-to-one advice and assistance, but they will still drive a hard bargain. Angel investors are there to “help”, but they are also there to maximise their experience and returns.
Unfortunately, the business world is littered with failed business entrepreneurs with ideas as big as their egos. If you have plans to become a substantial growing business, you will need to put together a management team in the early days. Individuals and the collective group will play a significant role in managing the business and creating a highly skilful qualified workforce. They say that a company is only as strong as its weakest link; often, this can be the entrepreneurs themselves, unwilling to give up any responsibility/control.
Adapting your team
It is essential to realise that the management team required pre-start-up will be different from that needed to grow an established business. Consequently, as you grow your business, you will likely experience a degree of turnover in management and sometimes employees. This is a natural process that you should embrace rather than fight.
Embarking on short, medium and long-term growth
The most successful businesses have all shown a degree of flexibility regarding the products/services they offer. As you grow with your client base, you will need to adapt your offering, prices and even expand into areas you had previously not considered. As you switch from a start-up company to a growing company, there are numerous factors to consider.
Cash flow is crucial
While securing sufficient finance to see you through the start-up process is obviously important, cash flow is crucial for a growing company. Unfortunately, we have seen many successful businesses fall by the wayside because of cash flow difficulties. Therefore, even before you begin trading, you should attempt to calculate cash flow forecasts as you advance. While a valuable means of monitoring the health of your business, it also acts as an early alert to potential difficulties. This will allow you to make changes before your company begins to experience serious cash flow difficulties.
Working capital finance
Whether you offer a service or products, you may require working capital finance as your business grows. For example, if your suppliers need cash settlement, this could create a significant gap between payment and receipt of sale proceeds from your customers. The introduction of additional working capital finance can often help you over the initial financing challenges. It is also vital to remember that your expenditure with suppliers will increase as your business grows. The more you spend, the more critical you are to them.
Negotiating terms with suppliers
Many supplies will require cash on delivery in the early days, especially where you have no credit history. However, as your business grows, your expenditure increases, there may be the potential to negotiate extended payment terms. In some cases, this may see you receive sale proceeds from your customers before you have even paid your supplier. Of course, this would be the ultimate goal for any business!
While there is nothing wrong with being loyal, you may need to consider additional or new suppliers as your business grows. You may be able to secure more attractive payment terms, discounts on large orders or a more dependable flow of goods.
Expand/adjust your offering
When we look at the growth phase of any business, it is essential to remember that unless you are growing, then relative to your competitors, you are going backwards. To protect your customer base, you may need to adapt and expand the services/goods offered on a regular basis. While sometimes an eye-opener, the best way to monitor changing trends is to build up a rapport with your customers and ask for their feedback regularly.
On occasion, you will need to be relatively thick-skinned, accept criticism, and respond to it. However, if your customers feel valued and you listen to their input, they will feel more involved and likely to remain with you longer.
You may have the best products, award-winning services and a great customer services team, but if nobody knows who you are, growth will be challenging to come by. Therefore, it is vital to provide finance for a healthy marketing spend to help grow your business. Whether you take on additional finance, such as a business loan, will depend upon the type of business and the scenario. However, if one dollar of marketing spend creates $10 of sales, it is a no-brainer.
You must maintain a high profile within your financial constraints, but go looking for customers rather than waiting for them to find you. You can bet your bottom dollar; if your name is not out there in marketing lights, your competitor’s name will be!
Acquisitions and mergers
Over the years, we have seen many successful businesses acquire or merge with competitors. Even though some business entrepreneurs struggle with this from an ego point of view, it is an integral part of business life. Corporate activities such as mergers and acquisitions lead to increased sales and the reduction/elimination of duplicate running costs. The double whammy of reduced costs and increased sales can have a massive impact on profitability.
Finance and cash flow are crucial, whether looking at the pre-start-up stage, actual start-up stage, or the growth phase in your business. These underpin the foundations of your company and will often open the door to additional finance in the future. Success often breeds success in the world of business, but it is the initial foundations that will ultimately dictate whether your business will thrive.