Thousands of people set up their own small business every year in the UK. Many of these will be thinking that opening a childcare setting will be a successful enterprise, especially if there’s plenty of demand for it in their local area. However, a stark figure reported by thisismoney.co.uk states that more than 40% of small British businesses fail in their first 5 years. Why is this? We explore some of the possible reasons below.

1. Insufficient funds

People often underestimate how much money is required to start and maintain a new business. Many of the financial problems you may encounter – especially in Year 1 - can be anticipated for in your business plan. You need to account for the fact that you might not fill 100% of your spaces in the first 12 months, and therefore you could make a loss before you become profitable. You should have contingency funds set aside to cover your costs, if this happens.

2. Poor management

Jonathan Goldhill, a small-business consultant in America, said: "I would say that the primary reason for failure of startups within three years is usually...management's failure to act, or management's failure to react, or management's failure to plan." Most entrepreneurs will lack the skill set they need for accounting, employee management and marketing their new childcare business. If you recognise that you have gaps in your knowledge, book yourself onto a relevant course. Alternatively, employ someone you know who already has these capabilities.

3. Not enough planning in the early stages

Some people are so keen to get going with their business that they don’t do enough strategic planning in the early stages. They want to rush ahead and get to the good bit: finding your premises, opening your doors and welcoming parents. However, if you take the time to outline what you want to achieve in your business plan and how you’ll overcome any obstacles (as well as properly forecasting your costs), you’ll be well prepared before you come across any problems.

4. Overexpansion

The phrase “Don’t run before you can walk” is especially pertinent here. Some business owners try to expand their start-up too soon after seeing a short period of success. The key to being sustainable is to grow slowly and steadily, by building a good reputation with local parents. That said, if the demand for places is outstripping the rate at which you can supply them, this might prompt you to consider expanding your business - but only after carrying out thorough research and analysis into how viable this is.

5. Cash flow problems

It seems crazy, but some very profitable businesses can actually end up going bust because of poor cash flow management. This means that when there are bills to pay, they haven’t got enough free cash to do so.  On paper, however, their assets may far exceed their liabilities! Poor cash flow management can be avoided with careful planning and ensuring parents are always paying you on time. An easy way to do this is to implement automated fee collection, so that parents pay you by monthly Direct Debit.

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