By Sam Bacall, Director at FFT

Starting a business is exciting. You’ve got the idea, the drive, maybe even the customers lined up and with over five million companies currently active in the UK, you’re in good company.

However, once the champagne bubbles have popped and the streamers are taken down, the reality can be sobering as official insolvency figures show that:

• Five per cent of start-ups fail in their first year
• 30 per cent of businesses launched in 2020/21 no longer exist
• In 2024, start-ups account for 46 per cent of insolvencies

If you are reading this and worrying about whether to even chase your dreams, it is worth considering that there are some common errors, that often don’t even occur in the first few years.

In fact, the first year isn’t the biggest danger zone and many entrepreneurs clear that initial hurdle, only to stumble later when money, energy and momentum start to run thin.

So, what goes wrong and what can you do differently? I hope my own experiences as an accountant and adviser to many start-ups can help you avoid the common pitfalls.

Poor financial controls

Many start-ups fail because they don’t get a grip on their numbers early enough. It’s not just about “keeping receipts in a shoebox” (don’t do this, there are better digital solutions) or running a quick budget on a spreadsheet.

If you can’t see your cashflow, profit and loss, VAT bill, etc, then you can’t plan effectively as you grow. Sooner or later, you’ll find yourself blindsided by a bill, a late-paying client or an unexpected tax deadline.

Strong financial controls mean:

• Separating business and personal finances
• Proper bookkeeping systems from day one
• Realistic, stress-tested cashflow forecasting
• Setting aside money for VAT and Corporation Tax

Ignoring this side of the business isn’t just risky, it is often one of the fastest ways to business distress and, eventually, failure.

Poor research

Every business starts with a good idea, but a successful business is built on the foundation of good research.

Just because you, your mum and your best mates love your idea, that doesn’t mean that there is a market to sustain it.

We know that research isn’t as exciting as cutting the ribbon on your first business, but it is the difference between guessing and knowing.

Here are some simple questions to ask yourself:

• Who exactly is my customer?
• How many of them are there?
• What are they paying now – and why would they switch to me?

Make sure you can answer these questions honestly and with facts to back them. Set unfair or unrealistic expectations now and you may frustrate yourself, your staff and investors who are committed to your vision.

Too much, too soon

Ambition is important, but overextension or multitasking can sink a young business.

Expanding into new products or hiring staff before you’ve nailed down your core offering can drain both cash and focus.

The start-ups that last tend to be the ones that master one thing before moving on to the next.

Growth is good, but it needs to be sustainable. A good business plan, with a clear roadmap is vital to ensure that you don’t overextend yourself or your resources, as well as keeping you accountable for the actions you take.

Lack of a clear business plan

As my last point alludes to, a business plan is essential, not just at the start, but throughout the life of your business.

This is your yardstick, by which you measure success and the mechanism by which you are able to plan ahead. What’s more, it can be critical in convincing lenders and investors to back you.

However, some owners think they can wing it, but without a clear plan that explains who your customers are, how you’re reaching them, what makes you different, how much you need to sell to break even, you’re relying on good fortune.

Please don’t treat this as a one-off document. Your business will change, the assumptions you made six months prior may have changed as your product/service evolves or the market adapts.

Tax traps

This is probably the one thing that all new business owners fear the most. No one wants to get a “knock on the door” from the tax man.

Unfortunately, I have seen too many start-ups who forget to account for VAT or who underestimate their Corporation Tax liability after their first few years of incorporation.

Reporting and paying tax correctly is a legal obligation of all business owners, whether you are a sole trader, landlord or the director of a limited company.

Ignorance isn’t an excuse and HM Revenue & Customs Won’t accept it as one, so you should build tax compliance and planning into your business from the beginning.

If you aren’t quite sure what you should be reporting or what reliefs may be available then it makes sense to get professional advice early, as it could save a tax bill or investigation in future.

Factors outside your control

Ultimately, there will also be things outside of your control that affect the success of your business. These might include:

• New competition
• A change in consumer behaviour
• An unexpected national/global economic downturn
• Supply chain shocks

These factors have been known to sink even the longest established businesses, so what can you do? Put simply, build resilience in your business by:

• Maintaining a financial reserve
• Diversifying your client base and suppliers
• Keeping your business plan live, not static
• Having trusted advisers who’ll help you spot risks early

Get a head start

I hope having shared these lessons you aren’t put off. The encouraging thing is that despite the level of start-up failure, the number of new incorporations in the UK is rising.

More people are choosing to take control of their own future and become business owners and you can join them if you have the right support.

We have seen first-hand how start-ups can thrive when the right foundations are in place.

If you’re setting out on your journey, speak to our experienced team for guidance.