We’ve all heard horror stories of enterprising startups going bust within the space of a few months; its a common theme all over the UK and the rest of the world. Sometimes this happens because of market saturation (an easy example is Fidget Spinners recently), but mostly this happens due to poor accounting decisions. Obviously every case is different, but here we’ll discuss the ‘usual suspects’ in the downfall of a startup.
First and foremost is the main candidate; keeping correct records. This is incredibly simple, but still where most entrepreneurs end up hurting their business. Many entrepreneurial ventures attempt to make themselves look more profitable than they actually are by either modifying their records, or incorrectly entering them in the first place. This practice is often seen with businesses which appear to have a good or great first quarter or even year, but which are then soon out of business after the period has ended. Accountants are fantastic at keeping records, and know the proper way to do this, but entrepreneurs tend to take a more haphazard approach to this. Say a business gets paid a £10,000 lump sum by a client for 5 months of ongoing work. Now, an accountant would note this on the balance sheet as bringing in £2000 per month for the next 5 months, while entrepreneurs who’d like their business to look stronger would note this is one £10,000 payment, making their company look profitable. This is a well-seen mistake in businesses worldwide, but ultimately leads to financial loss as investors see their company is not doing as well as predicted.
Another key mistake many startups make is to try and manage their accounts in-house, without the aid of a financial adviser. This kind of lax accounting practice is common, and many successful companies have begun their venture this way, but the possible mistakes made can ruin a company. The sheer allocation of resources for a startup is difficult to manage, and its almost always better to have an accounts manager than to spread your resources too thin; this easily caps growth.
There are two final mistakes which entrepreneurs commonly make, which are both the product of poor financial knowledge; poor analysis and using the business account as a personal account. Market analysis is a critical aspect in the finances of any business, established or not. By having clear, concise, and relevant goals for your business it paves the way for growth. The success of any business is only measured by market data and budget reports, and poor documentation gives rise to a multitude of problems. With a clear budget and plan, it’s possible to set both short and long term goals for your business, without which no business will thrive. The other aspect of poor financial knowledge is using your business as your own, personal bank account. This is dangerous, and could easily put you in trouble with the HMRC; nobody wants this.
The cornerstone success of an entrepreneurial business is having a clear budget, aims, and market analysis. Without any of these, a company is doomed to fail, and may end up driving bankruptcy.