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.

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Why Businesses Fail: Business Plans & Financial Models

Welcome to the Why businesses fail series. This is the fourth of five blogs that delve 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 having a carefully considered business plan is essential to the success of your business.  

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.

We all know the importance of a decent pitch deck when it comes to presenting a business idea to investors, but ultimately, they’ll be looking at the detail behind the pitch when making their decisions. Once you’ve started your business and got a few customers, you should be looking at your business plan and preparing it for an investor. This seems early but is the right time because that’s how long it takes to prepare for investment.

Investors might not ask for a business plan straight away, often they’ll request to see this after a few meetings. Entrepreneurs often wait until they’re explicitly asked before creating a business plan, which isn’t setting yourself up for success.

In reality, a business plan is a living, breathing document, not just something you rustle up on request for the purpose of your funding application to an investor. Showing an investor, a rushed, poorly considered, or insufficiently detailed business plan won’t fill them with confidence.

A detailed and carefully considered business plan isn’t just important for impressing investors – it’s one of the most important tools in your arsenal as an entrepreneur, and when used correctly it can be incredibly valuable for planning ahead, making decisions and staying on track.

The business plan should work for the life cycle of the business, which is approximately 3-5 years. Consider the milestones you’ll reach and issues you’ll face within this timeframe. It should be a professionally written document that you and your team refer to time and time again, meaning that everyone is literally on the same page. It’s not static, and should be amended as you go along. This allows you the flexibility to adapt to new circumstances and continue planning ahead.

As well as your business plan, you also need a detailed, well-evidenced and realistic financial model. The first question to answer here is that of why your business needs funding in the first place. Where are you hoping the business will go in the next 3-5 years? What specifically will the funding be spent on? How have you arrived at these costs? How will the meeting of these needs lead to more growth and profit? Specificity is needed here, as investors awarding significant amounts of money will want to know exactly where that money is going, and how it contributes to their return on investment.

You also should be proportionate and realistic about the amount of funding you ask for. There’s no exact rule about how much funding to request, as it ultimately comes down to your planning, but you shouldn’t expect to waltz out of your first investment meeting with one million pounds. It’s speculative at the early stages, but you can come up with a good financial model that’s relevant to the type of investor you’re approaching if you take the time to look at the detail of your business. Seeking the guidance of a financial advisor is a good step to take here, as they’ll know the right questions to ask you.

When it comes to your business plan and financial model, sit down and spend a lot of time on these. This is why investors often prefer to back entrepreneurs who’ve already tried and failed, because they know the steps to take and the questions to ask themselves.

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Why businesses fail: customer acquisition strategy

Welcome to the Why businesses fail series. This is the third of five blogs that delve 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 how you can narrow down your customer and find an effective marketing strategy to attract and retain them.  

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.

Once the product or service has been tested, it’s not enough to assume that it will speak for itself. Customers don’t come without being invited. It’s crucial to have a detailed customer acquisition strategy and a relevant, targeted marketing strategy alongside in order to succeed.

Firstly, define your customer. Not just ‘young women’ or ‘professional millennials’, but very specifically identified. Think about gender, age group, location, profession, and more. Similarly, your customer might not be an individual but a service provider themselves. You still need to be specific here. For example, if you want to sell to a university, who do you want to reach within the organisation? The students, the lectures, the staff? Knowing who your customers actually are is vital to the short- and long-term success of your start-up. Conducting market research tests on your intended audience is also a great way to measure if they actually want your product – often, you may be surprised by who your actual customers are.

At the early stages of a start-up, it’s wise to channel funds (even if they’re limited) into a solid marketing strategy. Test your consumer behaviour, determine advertising costs, and determine how many customers you’ll reach. Similarly, build up your brand reputation in order to garner recognition and ultimately, loyalty from your intended audience.

Customers show loyalty to authenticity, and your marketing should reflect a strong and consistent brand identity that is honest to the product itself. If you have a flashy marketing campaign but the product itself doesn’t hold up to scrutiny, you risk being slated online and by word of mouth. This is why the marketing strategy itself only holds up when the product does – which bring us back to the importance of understanding the problem you’re solving, and carrying out extensive testing on your intended audience.

Within your customer acquisition strategy, you should be familiar with certain metrics. How will you acquire your customers? What is your cost of acquisition? How much marketing do you need to spend to acquire one customer? How are you going to retain that customer?

Read about how to identify a need in the market and attract investors in the first two blogs of the series.

 

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Why businesses fail: Being unattractive to investors

Welcome to Why businesses fail, the second of five blogs 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 some practical tips to get investors to demonstrate traction in your business and attract potential investors.

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.

Being unattractive to investors is a primary reason why some start-ups fail, and there’s a few pitfalls to avoid here. One big one is not showing traction.

Having a strong and evidenced market need for your product or service is the best way to demonstrate traction. By traction, we don’t mean a few thousand likes or free users – that’s not enough for an investor. It needs to be clear that this engagement is converting into paying customers, which is a trackable and easily identifiable metric. Engagement without custom isn’t traction or validation of your product. It could be a sign that you’ve got great marketing or that you’ve got a particularly active customer base, but if they’re not actually buying your product it suggests they don’t really need it.

One metric you should always know as part of your financial model is how many customers you need to stay viable. Before you start pouring hours into creating content, or spending time and money adding new features to your product, ask yourself: “What value am I adding?”. If the effort, energy and resources you use won’t actually convert to more sales, you should consider if it’s really necessary.

Investors vary with the level of traction they’d like to see, and different types of investors look for different amounts. For example, if you’re an early-stage start-up you’re likely looking at individual investors like Angels. Angels want to get involved at an early stage and take a punt on your business, if they see something in you. At a later stage, when you’re in revenue, you might use Seed Investors. Seed Investors get involved when you can demonstrate more growth that they want to get on board with. Generally speaking, investors want to make ten times return on their investment. This means you need to demonstrate traction which suggests they’ll be able to achieve this by investing in you.

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