The best of times, the worst of times

According to politicians and pundits, the UK’s entrepreneurial companies are to be the engine of our economic recovery. However, they need to be aware of the dangers in order to succeed.

Fast growth businesses punch above their weight on wealth and job creation. According to innovation agency NESTA (the National Endowment for Science Technology and the Arts), this kind of company was responsible for nearly half of all new jobs for the period from 2007 to 2010. They are resilient too, with lower insolvency rates during recession than slower growth companies, according to business information company Experian.

Controlling fast growth

There are challenges that come with fast growth, however. When a new or small company wins a big contract, it is all too tempting to focus on that enhanced top line, buying in raw materials, rewarding key members of the team or taking on new employees, with no thought for the longer term. But if further business wins don’t materialise, hard-pressed management teams may find themselves scaling back, moving to smaller premises or even laying off staff.

Bobby Lane, partner at central London chartered accountants Shelley Stock Hutter, advises small and medium-sized business across a range of sectors. “In early stage businesses, in particular, the saying ‘you eat what you kill’ holds sway,” he says. “The natural urge of the entrepreneur is to take on any business they can. Often that means no forecasts, no business plan and no strategic financial plan. They don’t ask themselves how they are going to finance it or what the working capital requirement is”.


“Understanding that growth has to be funded in an appropriate way is the first step,” Bobby continues. “Banks are currently less inclined to agree loans and overdrafts unless they can be confident they will be repaid or can find adequate security for them. And among the owner-managers of smaller businesses there is often an education gap as to the alternatives. Asset-based lending and invoice finance can offer a flexible and scalable form of finance”, he says. “New players in this sector mean that companies can gain access to funds against specific invoices rather than whole debtor books. If you understand the facility, this is the best form of finance for growth businesses. Security requirements are lower and the facility grows as the business grows.”

Business intelligence

New business wins are exciting but they can also be distracting. “To avoid the dangers of rapid expansion and over-trading, businesses need the discipline of sound information, which means reliable cashflow projections, forecasts and monthly management accounts,” says Fiona Hotston Moore, a partner at chartered accountants Crowe Clark Whitehill.

“They also need to understand that information. Often that means finding an external expert or advisor. The entrepreneur often needs a mentor, someone who will challenge them on those figures and avoid flattering them or merely confirming their assumptions,” she says.

Smoothing out growth

According to Fiona, ad hoc contract wins might do a great deal for confidence, but they don’t make for sustainable growth. “The key is exceptional customer focus within the management team”, she says. “Are you fully meeting the needs of your customers? Can you sell more to them? Can you leverage off a strong brand into different customer groups or sectors?”

Fiona believes that to bring in sales more consistently, businesses will eventually need to look at diversifying. But she suggests that they need to proceed with caution, making sure the core product and business is stable and profitable and that there is a strong rationale for diversification.

Bobby Lane agrees that management teams must also keep a close eye on the profitability of any new deals. “Many smaller businesses fail to distinguish between sales and profit, leading them to take on big contracts that may turn out to be low margin distractions,” he says. “Focusing on sales, rather than gross profit, is a recipe for extinction, particularly where there is little in the way of working capital to fund that new business in the first place.”

The one customer risk

Relying on just one customer for 50% or more of company revenue is very common, particularly if the customer in question is large, well established or growing fast itself. Bobby argues that it is important nevertheless to model the downside risk. “You are potentially out of business if they decide to do things differently,” he says. “Look at new clients and new revenue streams. The other side of this is to keep your cost base as fluid as possible to ensure that if Doomsday does ever arrive you are able to make the cuts necessary to ensure the business survives.”


For seasonal businesses forecasting is not an extra but a necessity. A business with revenue spikes in January and April needs to make sure that it can still cover overheads for the months in between. Businesses like these need cashflow forecasts for 12 months ahead and ideally three-year business plans.

Most businesses in the UK are undercapitalised. They also tend to overlook forecasting as a discipline. Greater rigour on these tasks, along with a focused management team, would help to avoid the cash crises that have stopped many promising businesses in their tracks.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK