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Starting your own company can be a risky business. Photograph: James Hoathly/Alamy
Starting your own company can be a risky business. Photograph: James Hoathly/Alamy

Starting a new business: how to avoid failure

This article is more than 8 years old

Many startups fail. From choosing a partner to researching the market, here are five ways to give your business the best chance

Running your own business can be very rewarding, but success is not always guaranteed. Businesses are most vulnerable during their early years of trading – half of all small businesses fail in the first couple of years, according to former Dragons’ Den entrepreneur Theo Paphitis.

There are an endless number of traps that a new business can fall into. Here are five ways to give your business the best chance.

Set clear goals

Does your business have a clear mission, yearly goals and a long-term gameplan? Having a business plan in place will help you to focus on these.

Ensure your goals are specific, measurable, achievable, results-focused and time-bound. For example, a hotel owner might set a goal to increase average occupancy rates from 70% to 80% in the next 12 months in order to increase profitability, by making rooms available to book on hotel booking websites.

Review your goals regularly and set yourself new ones when appropriate. Most importantly, communicate your mission and goals to your fellow co-workers and employees and ask them to contribute to this process. Don’t keep them in the dark. Their livelihood is tied to the success of your business, so make sure they know what they need to do to keep your business healthy.

Remember: cash is king

It’s worth remembering the old business saying “turnover is vanity, profit is sanity but cash is reality”. A shortage of cash is generally what sinks small businesses so learning to monitor your cashflow is critical. It’s important to forecast your cash outflows and cash inflows for the next 12 months to ensure that you will have sufficient cash to run your business.

Check the date of key outgoings, such as VAT and payments for rent and rates, to ensure that you have enough cash for when these need to be paid. Sense check your forecasts with someone you trust, such as your accountant. Do they agree that the amount of cash you have forecasted to generate is realistic, based on his or her experiences of similar businesses?

Always be prepared to readjust your forecasts when things don’t go as you had planned.

Choose your partner carefully

Picking the right person to help you turn your business from an idea into a success is as important as choosing a life partner. It’s all too easy to go into business with someone you know well – you get together, think of an idea and decide to get started – but it can so easily end in tears. Don’t forget that if the business does not work as planned, you are putting your personal relationship with that person at risk. So before you get started, think carefully about the good, the bad and the ugly of being in business with a particular family member or friend.

Put in place an agreement which sets out the rights and obligations of each partner in the business. All parties should be clear from the outset where they stand. The agreement should also deal with what happens when things go wrong, for example, does one partner have the ability to buy the other out, which may favour the wealthier partner, and continue to run the business? Or should the business simply be wound up – which could result in the destruction of a successful business?

Know your market

Knowing your market and accurately assessing the potential demand for a product or service is the key to an idea becoming a success or a failure. If your product or service has a very limited market, you won’t be able to sell enough of your product to create a successful business. You should take time to understand who your competitors are and identify what differentiates you from them. Perhaps you can offer a better service or compete on price. It all boils down to understanding why customers would rather buy from you than your competitors.

Get professional advice when you need it

In a company’s infancy, it is all too easy to skimp on professional fees by dealing with issues that you shouldn’t be doing yourself. It’s better to spend your time focusing on running and growing your business rather than re-inventing yourself as an accountant, lawyer or another professional adviser.

The key is knowing when to call upon the professional adviser, and most will tell you when you are asking them to do something they will add no real value to or you would be better off dealing with yourself.

Speak to friends and family members who have used these services in the past to give you recommendations. You might even know somebody in your circle of friends or within the family who would be willing to give you some free advice.

There is a lot to think about when starting your own business but avoiding these common pitfalls will give your business a good chance of success. It can be highly rewarding while giving you the autonomy you would not get working in someone else’s business.

Rahul Thakrar is a solicitor at Boodle Hatfield, acting for fast-growing entrepreneurial businesses

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