Why businesses fail: Financial management

Welcome to the Why businesses fail series. This is the final instalment of the series that delves into the reasons for businesses failing and offering solutions. This series was launched by Lucy Robinson of Birkbeck Futures and Ghazala Zia from Windsor Swan. In this blog, they share why financial planning should be high on the list of priorities for new businesses and start ups.  

Lucy Robinson is the Employability Consultant for Business and Enterprise at Birkbeck Futures. She runs the Pioneer programme for aspiring and early-stage entrepreneurs and hosts an enterprise series on the #FuturesPodcast.

Ghazala Zia is a Venture Capital Advisor at Windsor Swan, a boutique London business advisory firm. She has an extensive legal background and currently specialises in advising start-ups of all stages on funding, strategy and business analysis.

Young businesses often prioritise hiring team members to focus on technology and sales. Obviously, these are very significant elements of the start-up, but neglecting the management of finances is a common reason businesses might fail.

A very common reason for a business failing is running out of money. Frequently, entrepreneurs will burn through cash to the brink and then be left with two to three months’ worth of cash, which is really unattractive to investors. This comes back to investors wanting to secure a return on investment and showing poor financial management makes you high-risk. Instead, having eight to twelve months’ worth of cash indicates that you’ve got time to grow your business and doesn’t come off as desperate.

In the beginning, having access to someone who performs a CFO-type function could be the difference between succeeding and failing. This doesn’t have to be a full-time team member if that’s not feasible, as this is a function that can be outsourced fairly easily. Essentially, this is someone to discuss how you allocate your costs, draw up your financial model, and manage your finances day-to-day for the business. Think about this before you receive funding, as they can also help you plan ahead. Showing investors that you’ve taken this initiative is also a big plus in terms of your trustworthiness.

The misconception is often that we don’t need to hire a CFO or shouldn’t spend money on this, as an accountant can perform the same function. Whilst accountants are great at what they do, their role is more about looking backwards than forwards. In essence, planning ahead financially isn’t exactly their purpose. When looking at the finances for your start-up, it’s speculative and forward-looking – largely making educated guesses. So, you need someone with this skill set, which is more likely to be a financial specialist who’s worked in start-ups before.

Read more from the Why Businesses Fail series:

 

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