- The financial obstacle course. Business boils down to money. People starting their own business may do so with idealistic notions of revolutionizing their lifestyle or doing something they enjoy, but these objectives require that the idea and the business actually make a profit. Managing your money is one of the cornerstones of business success. When you start out, finance can seem straightforward but the bigger you become, the more complex the financial demands.
- Some manage to keep it simple. Denise O'Donoghue, managing director of TV production company Hat Trick Productions which makes 'Whose Line Is It Anyway?' and 'Drop The Dead Donkey', says the company has never borrowed money. 'I have a very domestic attitude to running a company. Keep overheads low and don't compromise on product.' This is a useful philosophy to have (Margaret Thatcher went one stage further and applied domestic prudence to the economy of a country) but rather difficult to implement when you are juggling money in the early stages of your business development. It is very easy to start off with noble intentions, only to quickly find that they are not the best way to make a success of the business.
- Hard and fast rules - such as refusing to contemplate borrowing - are all well and good, but can be difficult to adhere to. If you rule out borrowing, how can you fund the expensive machines which you must have to stay in business? The onus must be on flexibility laced with caution, professional advice and commonsense.
The financial obstacles facing small businesses are many and varied. None can be ignored - overlooking them can have serious repercussions.
The personal and family cost
A survey of 700 small firms carried out by the National Federation of Enterprise Agencies and The Observer newspaper found that 58 per cent of businesses said that the single largest source of funding when starting up their business was their own money and savings. A further 13 per cent cited family and friends as the largest source of support. Bank loans were used by 12 per cent.
There are heavy personal and social costs in the start-up, survival and growth stages of a family business for entrepreneurs, their families, relatives and friends. In the first instance, companies often rely on money from the owner, his or her family and sometimes helpful friends. This can be an onerous burden. It is one thing explaining to the bank manager that business is not as good as anticipated and you require a bigger overdraft, quite another to ask a friend or family backer for another injection of cash.
While it may be extremely useful to receive financial support from family and friends, both sides need to treat it as a business arrangement. If the terms aren't clear to either side, there is a strong chance of confusion or arguments. It may be worthwhile, therefore, to draw up some sort of legal agreement or at least put the expectations of both sides down in writing. This can save on wrangles later on.
Matching financial arrangements to changing conditions:
Nothing stays the same. Though you may start the business on a shoestring, at any time you may need to borrow money or change the way the business is financed. Very often this is a crucial stumbling block to a business developing successfully.
The small business can't win. In order to grow it might be vital that you buy a new machine, another computer or other premises. This may require more money than you have at your disposal. As a small business, the proportionate increase is likely to be large and your ability to receive financial support is limited. The catch-22 is often that to develop you need capital investment; but your very smallness is off-putting to potential backers.
Another common obstacle - part of the same catch-22 - is that you don't have enough assets to secure loan finance. Again, your very smallness is a handicap. Small businesses are often under capitalized. To back their loans, financial institutions will insist on some form of collateral. To secure loan finance the small firm owner provides personal collateral. This may be in the form of a guarantee or property deed. While this may secure extra finance, it also may erode limited liability and greatly adds to your personal financial risk.
The culture of your business:
As if these problems weren't enough, they are often worsened by the attitudes and company culture created by the business owner. If you start a business with nothing and build it up, it can seem like a loss of face to go to a bank to ask for a loan. Often this justifiable pride prevents opportunities for future growth being taken. But all you have to lose is your pride -and you may gain a larger and more profitable business.
Similarly, small businesses can be suspicious of bringing in specialists to help them with their finances. Initially, it may be comparatively straightforward to do your accounts and finances. You may feel quite confident of being able to handle it. As the business grows, however, so does the financial complexity. At this stage it is worth having an accountant.
It is important to have an accountant. An accountant can make your life a lot easier though it may be an extra expense you believe you can do without. They can cut through apparently intractable problems, simply through their experience in knowing who to contact and what to do. Using an accountant shifts the burden of dealing with the Inland Revenue to someone who knows the ins and outs of their complicated procedures.
It is worth shopping around, asking other people which accountants they use, so that you find someone you feel comfortable with and who is happy to deal with your business. Accountants can be relatively inexpensive - the expense depends on how complex your business is and, therefore, how much time they need to spend on your accounts.
