Over a quarter of a million small UK firms ended 2016 in a state of “significant” financial distress, according to new research that highlights the growing difficulty of keeping a new business alive.
The Red Flag Alert report, published by recovery firm Begbies Traynor, takes a business health check every three months and found that, for the final quarter of 2016, 91 per cent of companies struggling to survive were the UK’s “smallest businesses”.
In a statement, Julie Palmer, a partner at Begbies Traynor, said that small firms were the “lifeblood” of the economy, adding that a trade deficit of £12.2bn in November was worse than many had predicted.
“The scale of financial distress at the end of 2016 just goes to highlight the fragility of UK micro businesses, many of which are underfunded, lack management experience or are flawed in concept.”
Palmer warned that the short life-expectancy of young companies and harsh economic conditions meant that many owners were quickly tempted back to more secure employment.
“Although record numbers of new startups continue to join the economy each year, a large proportion don’t stay in business for long, with growing numbers of aspiring entrepreneurs returning to more established businesses as soon as the opportunity arises,” she added.
Small businesses operating in London made up a quarter of those in “significant financial distress”, with 64,764 companies struggling.
The report highlighted “lifestyle” businesses – ventures founded as a result of unemployment – as typically short-lived. Of the 470,000 companies founded in 2011, almost 57 per cent have since folded.
Citing uncertainty around Brexit negotiations and the direction of US trade policy as causing financial distress, Begbies Traynor executive chairman, Ric Traynor, concluded that “2017 could well be a defining year for UK business”.
Avoiding financial distress as a new business
Business Advice spoke to the founder of knitted beanie brand Zaini Hats, Miranda Harper, in 2016. She told us of the importance budgeting plays in the early days of trading.
“The key for Zaini Hats in the beginning was having a £20,000 pot to work from, which helped hugely and allowed me to get everything I wanted to do for year one done. It was then a case of working from the profits, which we have been doing ever since.
“Budgeting and not running out of funds was crucial in ensuring that we gave it the best shot to get off the ground and started selling as quickly as possible,” Harper said.
In a recent article for Business Advice, cash flow specialist Kelly Clifford outlined the seven most common profit draining mistakes that startups make in the first year.
The most repeated error, according to Clifford, was a failure to factor in fixed costs when pricing.
“When deciding on pricing, many small business owners make the mistake of only focusing on the gross profit margin and tend to forget about allocating something for their overheads or fixed costs. They then wonder why they don’t make any profit,” she advised.
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