Need 2 know: Why older doesn’t mean safer for start-ups

Everyone knows that start-up businesses have a higher risk profile to them. In the early years the rate of failure is higher.

So when are you safe?

If your business is at or near year number three does this mean that you are out of the danger zone? And if it does, what should you be doing to manage the transition from infancy to maturity?

Here’s a quick snapshot:

1. Older doesn’t mean safer

You only have to look at some of the business that have failed in the current year to know this.

We all expect some businesses to fail but when you see well-known brand names and businesses that have been established for 20-plus years fall over it is a reminder that you continually need to be on guard. Time and size do provide some lowering of risk.

They also mean that the costs of being in business are much greater and if something goes wrong you will not be able to fix it up by a small injection of funds into the business or reducing your drawings.

Your overheads and the amount of funds you need to maintain the business is higher. Too many bad business decisions can put you in an unrecoverable situation.

2. Know that there will be a transition

Moving from infancy to maturity normally brings with it some growing pain.

You may find that growth is placing pressure on cash and your infrastructure is not adequate to manage increased size.

Maturing the business does not happen automatically. It needs to be planned. Forward planning will become more important.

In infancy the focus is often on the short term and survival. As the business matures, medium to longer term planning becomes far more important.

3. You may bump into some hurdle points – expect these

A lot of businesses grow reasonably quickly to a level and then seem to plateau.

In some cases it is a conscious decision, but often it seems that the business has just stopped growing.

This can be frustrating for the owners as it seems that they have hit the ceiling and they just bounce up and down around that point.

Often the reality is that they have hit a natural hurdle point. Unless they change their approach they will not break through to find the next natural level of the business.

4. Financially, by year number three the focus should be on profits, not just earning an income

You should know what level of profitability the business should be able to achieve and your targets and business plans should be driving for that.

Characteristics of mature businesses include a reasonable level of profitability, more refined business systems, a clear business model and some levels of delegation of management beyond the owners.

Get it right and the rewards are much greater, in profits, value and the satisfaction of seeing your business grow and succeed.

Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.