Learning to keep the firm afloat

New business start-ups are growing at a faster rate than ever. According to the NatWest Business Start-Up Index, 122,000 new businesses were launched in the second quarter of this year - a 25 per cent increase on the same period last year. Over the entire year, 400,000 start-ups are predicted, against an annual average of 340,000. The biggest increase can be found in businesses launched from home. The problem is, however, that NatWest claims that 80 per cent of them are likely to fail.

Why? One of the commonest causes is lack of financial management skills. Individuals may be skilled at landscape gardening, catering or training; it does not follow that they can manage cash flow, costing and budgeting, credit control, stock control, profit margins and dealing with banks.

As a result, a new scheme to help young and growing businesses to acquire the necessary financial management skills and avoid the risks of failure has been launched by the UK 200 group of chartered accountants, a national network of local practices specialising in the growing-business sector. The group has devised a programme of financial management workshops run by member firms in many parts of the country.

Comprehensive trials last year showed that the majority of participants would recommend the workshops to other owner-managers. Short, sharp three- hour sessions at a cost of pounds 60 plus VAT were found to be highly effective and are very often recommended by bank managers. Harry Brown, one of the originators of the workshops and a partner in UK 200, says the feedback has been excellent. "The ground we cover is seen as highly practical, especially managing cash flow and improving profit margins, and new ideas picked up can be implemented fairly quickly."

The next step - financial control reviews - is another innovative move by the UK 200 group designed to help growing businesses improve their cash flow and profit margins and give bank managers the confidence to provide or increase lending where necessary. They are cost-free and are increasingly recommended by banks to customers who need support that, on the face of it, may not seem justified. Business growth, for instance, may appear to be successful, but it could be better. Reasons for this can often be traced to pressure on the owner-manager who is not focusing sufficiently on financial management.

In one case where a seemingly successful manufacturer wanted extra facilities, the bank suggested a financial control review, which showed that the business carried some pounds 50,000-worth of obsolete stock that had been paid for; it allowed a write-off saving of pounds 12,000 in tax. The review also revealed that the company always sent out invoices on the first of the month after a sale, whereas deliveries were being made daily. That was changed swiftly. Invoices are now sent out daily, and the combined result of sorting out those two weakness enabled the bank to lend an additional pounds 50,000 with confidence. In turn, improved cash flow enabled the company to pay off the old and the new loans faster.

In another case, an expanding business experienced serious cash flow problems. The financial control review showed that the owners were not getting the right information - true profitability, details of overheads and so on. Accounting procedures that were adequate when the business was started were not efficient enough to cope with the growth of the business.

Clear vision rather than too much optimism remains a key factor in the success of many businesses. Companies fail when they lack such clear vision and a firm set of principles and ideals.

The UK 200 group of chartered accountants, tel: 01252 333511