Anyone setting up a new business can expect to experience a great deal in their first 12 months.
On one hand, it’s an exhilarating journey and one that’s hugely rewarding. On the other, it’s extremely busy, mentally and physically demanding, and undoubtedly tough at times. In this guide, we’ll cover exactly what you can expect from your first year as a new business owner, as well as the types of challenges you’ll encounter and how to prepare for them. Let’s get started.
Why is the first year of business difficult?
Encountering a series of hurdles during the first year of business is an inevitable part of every entrepreneur’s journey. But, why do these repeated challenges tend to accumulate in the initial 12 months?
Setting up a business often stems from a culmination of motivations, ranging from a successful career, a personal passion, or a longing for freedom. Despite the common belief that proficiency in a field automatically translates to entrepreneurial success, the reality is that not everyone is inherently born to be an entrepreneur.
The challenge lies in transitioning from a skilled technician to adopting the entrepreneurial mindset, which involves acquiring specific skills and embracing a forward-thinking perspective. The first 12 months become the ultimate challenge – a period to prepare for sustained growth, by moving beyond immediate tasks and considering the long-term vision for both yourself and your business.
The importance of a business plan
Creating a business plan can help prepare you for some of the hurdles ahead.
A business plan serves as a comprehensive roadmap that typically includes elements like market analysis, operational plans, marketing strategies, key objectives, goals, and tactics for achieving them.
Many people initially disregard a business plan on the basis that it is not a legal requirement. However, its significance cannot be understated. Whether you’re in the early stages of forming your company, or you’ve already started operating, a well-thought-out business plan offers invaluable insight.
Business plans are not intended to be static documents; instead, they develop with your business, and should be updated along with your journey, to reflect changes in the market and growth in your knowledge.
As well as helping guide the direction of your business and address potential challenges and timeframes, your business plan could prove vital when it comes to securing funding or raising capital. It’s common practice for lenders, banks, investors, and potential business partners to request it when forming decisions about your company. So, despite it not being a legal requirement, it’s a formality we’d strongly advise you to undertake in support of a successful first year.
Measuring your performance
With so many facets and countless tasks to complete, business owners often find themselves more focused on operational activities than on assessing overall performance in their first year. However, determining whether your strategies are effective, and catching potential issues early on, is crucial to your company’s success.
In the initial stages, profit might not be the most accurate gauge of success, considering that many businesses take time to turn a profit. Instead, various alternative metrics can provide valuable insights into your performance. Quantitative measures like revenue, market share, or, in the case of an e-commerce business, website traffic and bounce rates, can offer a more full-rounded understanding of your business’ standing.
Beyond quantitative metrics, qualitative assessments are equally crucial. Paying careful attention to customer feedback is a huge part of this. Feedback allows you to identify and rectify issues in your business processes, leading to long-term improvements. Complaints, while seemingly negative, can be your greatest source of learning as a business owner.
Understanding cash flow
Understanding cash flow is paramount, especially for new businesses. In its simplest form, cash flow refers to the money entering and leaving your company, typically tracked through cash flow statements or reports over a specific period.
But beyond its accounting implications, cash flow should be embraced as a mindset integral to financial management. Failing to comprehend and manage it effectively could lead to depleted bank accounts, which would be detrimental to your business. You should aim to operate with a keen awareness of your daily balances, understanding what needs to be added to your balance each day and what’s in your bank account at all times, to plan beyond the immediate future.
This mindset not only promotes organisational efficiency, but can also prove useful when engaging with third parties like lenders, banks, or investors, who often seek a detailed cash flow report to assess a company’s financial health.
Expanding your team
As you navigate the complexities of a new business, it’s important to recognise that, despite the superhero image often associated with business owners, it’s impossible to do everything alone. The diverse skill set required for success spans financial management, operational capabilities, and various other facets that may be challenging for just one person to tackle.
Moving your business forward often requires additional support, and there are several avenues to consider depending on your goals and budget:
- Hiring professionals: Bringing in a dedicated professional on an operational level may be an option for you, but this can often pose challenges for new businesses with limited capital.
- Bringing in a business partner: Taking on a partner who complements your skills, in the sense that they can excel in areas you can’t, in exchange for an equity stake in your business, can be a strategic move depending on your business structure and objectives.
- Engaging with a consultant: Seeking the expertise of third-party consultants allows you to gain specialised knowledge, without the commitment of hiring a full-time employee.
Turning to third-party support
Beyond your direct team of people, you may want to consider bringing in some external support. One of the most crucial engagements you can make as a business is with an accountant. A good accountant is worth their weight in gold; not only can they assist you in compliance matters like your annual accounts, but they can also help you streamline your financial processes, make transformative recommendations and even integrate your bookkeeping software.
Once your company is up and running, you’ll usually find you need a whole library of documentation to hand in areas you may have never anticipated. Elements such as website terms and conditions, employment contracts, GDPR, and privacy policies – the list goes on. While there are plenty of customisable templates available online, it can be worth engaging the help of a legal professional to ensure you’re always remaining compliant.
So, what exactly does it mean to be compliant? It’s about fulfilling your legal obligations when you create a legal entity for your business and are therefore entering into an agreement with the Government. The first 12 months of running a business are marked by the challenge of simultaneously getting it off the ground and meeting a series of ongoing legal obligations.
Primarily, for a limited company this will involve tasks such as filing a confirmation statement or annual accounts, along with addressing various tax considerations.
A company formation agent, like 1st Formations, together with an accountant, can help you navigate the complexities of compliance throughout your business’ lifecycle, ensuring vital administrative responsibilities are taken care of against the most up-to-date frameworks.
Failure to meet obligations within stipulated timelines can result in fines, and in severe cases, the loss of your company. Beyond legal consequences, the reputation of your business is also at stake. What’s more, potential investors, partners, or stakeholders conducting due diligence may view a history of non-compliance as a red flag, eroding trust in your ability to manage the business effectively.
It’s crucial to recognise that staying compliant is not just about ticking boxes, it’s about safeguarding the present and future of your business.
Attracting and retaining talent within a new company
One of the biggest challenges facing businesses today is attracting and retaining people.
80% of companies struggle to hire for specific skills according to a report from the Federation of Small Businesses (FSB). Although there is no one-size-fits-all solution, there are certain strategies that can help give your company a competitive edge:
Competitive salaries: Understanding industry standards is crucial when determining salaries. Many industries offer reports providing guidance on the expected compensation for various roles.
Positive work environment: Beyond monetary benefits, the work environment plays a pivotal role. Creating an office space conducive to both productivity and social interaction can significantly impact employee satisfaction.
Flexible working arrangements: Acknowledging the evolving landscape of work preferences, especially the desire for remote or hybrid work models, can broaden your talent pool. Offering flexible working arrangements aligns with current trends and makes your company more appealing to potential hires.
Training and development: Investing in the growth and development of your employees not only enhances their skills but also encourages loyalty. Providing training, both internally and externally, and supporting further education or professional qualifications can be a compelling offering.
Employee share schemes: Considering the allocation of shares to employees, especially in leadership or key positions, can be a game-changer.
HMRC-approved schemes like Enterprise Management Incentives (EMI) provide a tax-advantaged way to offer ownership in the company, aligning the interests of employees with the success of the business.
While the idea of giving away shares may seem daunting, share schemes often involve options rather than an immediate transfer of ownership. This allows employees to earn their stake over time, ensuring a tangible benefit tied to their duration of service and contributions to the company.
We hope this guide has highlighted that with the right strategies, preparation, and commitment to compliance, your first year in business can be a hugely rewarding experience.
It’s important to recognise that some challenges are inevitable as a business owner, particularly in your first year. Sourcing expert support can help you navigate the hurdles ahead, and set the foundation for sustainable business growth for years to come.
If you’d like to learn more about how 1st Formations can help keep your company compliant, contact our team today.