There are a huge number of reasons why so many businesses fail in the first year. This guide will help to put the foundations in place to give you the greatest chance of business success.

Make sure you are able to solve the problem you’ve identified

One of the most common errors when launching a business is identifying a solution and then finding the problem it solves afterwards. It is vital to consider the opposite. You must identify a problem for your customers and then find a solution tailored to that.

Experience in the industry you will be operating should prevent you from falling victim to the Dunning-Kruger effect. This occurs when you perceive you are able to complete a task to a degree higher than your ability. It can lead to a business failing as you are unable to provide the solution that you have identified. Create a plan to outline how you are able to solve the customer’s problem and how you will do so. Do you solve the whole problem or part of it? Is it financially viable to approach the problem in the manner you have chosen? This will highlight problems which you may have overlooked in satisfying customer needs. Once you are content, show it to people you trust and ask them to criticise your plan.

Only focus on your ability to solve the core problem. If you are able to do this, understand that you can outsource other services. This will improve both your efficiency in completing core tasks and your ability to grow.

Researching your target market is essential. A whole article could be written on the topic, so it is worth taking time to research this extensively. Independently researching your target market will help you to craft all aspects of your business. It forces you to rethink your assumptions of your customers and product. You can then rebuild these assumptions to know exactly who wants your product, when they would use it, how they would use it, and why they would use it.

Understanding your target market allows you to identify prospective clients before you even begin trading. At first, you will only convert a tiny percentage of these clients as you have no proven track record. As your gain experience, you will increase the rate at which you win clients. Do not overstretch yourself. Satisfying 3 clients is better than serving 6 inadequately. It is cheaper to retain clients than to win new ones, so focus your energy on impressing current clients.

Choosing your name and company structure

So, you have identified a problem and understand your market. You can now begin to consider the more administrative aspects of starting a business.

Your company structure will shape how customers perceive you and how exposed you are to financial risk. Companies limited by guarantee are the most popular company structure in the UK. With this structure, you keep your finances separate from the company’s.  As a limited company, your personal exposure to financial risk is much lower than as a sole trader. With a limited company, you are not responsible for the company’s debts upon the company’s closure. This protection does come with tax implications, however. Any profits drawn from the business will be subject to both corporation and income tax.

Check that the company name you would like to claim available. You can check whether a company name is available to register online. This checks that a company has not already registered the name with Companies House. If your company name is registered in a different country, it shouldn’t cause you any issue  as trademarks are usually territorial. If you are unsure, you can search for existing trademarks. This will check your company name does not infringe on any existing trademarks.

First year financials

One of the biggest killers of companies in their infancy is the inability to control cash flow. A negative cash flow inhibits a company’s ability to pay debts, buy new inventory, and can cause insolvency.

When starting a company, borrow as little money as possible. Borrowing money can be much more damaging than selling equity to finance growth. This is due to loan repayments contributing negatively to your cash flow each month. Ensure that you have researched exactly what you need from an office and when placing inventory orders. Do your research on how much you can afford to spend, and then scale up when you can afford to.

A budget should be set to work out what you can afford to spend on the major aspects of your business. It is important to quantify how much are willing to spend to acquire a new customer. This will outline the money available for other business costs. Once your business is established, it is important to calculate your customer lifetime value and churn rate. This will allow you to know exactly how much you are able to spend on acquiring a new customer.

External factors can also have significant effects on a company’s cash flow. You can control the effects of some of these factors. Understanding the early warning signs of bad client debt will protect you from late and unpaid invoices, which can debilitate a company. Understanding the warning signs of a client who may be likely to default on payments will significantly help your chances of surviving the first years of business.

This guide should provide you with a solid foundation on which to start your own business. Make sure that you have consider these steps extensively and have a plan for how you will execute them. It is easy to overlook contingency planning when everything is going well in a business. Don’t get overconfident and think that you don’t need one. Like a toilet plunger, make sure you have one in place before you need it.

Joseph Hurst works at Company Formation MadeSimple.