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I have recently been to look at a nursery that highlighted some of the essential elements that need to be considered when you are starting off a new business. The company had taken a lease, which had been personally guaranteed, on an old school building that had previously been used as a nursery but had been closed for two years. Approximately £30,000 had been spent on refurbishment and equipping the business and it opened in July 2014. In November 2014 the company had to close because it had run out of money. The director had sold his house to enable him to invest money in the business; he had borrowed money from family; and he had several personal guarantees to satisfy not least being the potential liability to the landlord of £120,000.
What could this new business have done better?
Several mistakes had been made and I thought it would be useful to outline some of them.
1. No assessment of the demand for a nursery in the particular area had been carried out. One business had already closed but the reasons for this had not been established. Working parents tend to use a variety of ways to look after their children. They use other family members, part-time working, and paid for care all in an attempt to make the decision to return to work financially viable. The director needed to have a reasonable estimate of both the number of children that were likely to be placed in the nursery and also the length of time they would be there.
2. Even though the nursery had completed all the statutory compliance work that goes with operating a business that looks after young children, it was unrealistic to expect that parents would instantly trust a new business to care for their son or daughter. The business needed to build a reputation in the area but, unfortunately, it did not have the funds to give it the time to do this.
3. The director had no idea about the money he needed to make. The business had billed about £4,000 per month, and he felt that it needed to bill £10,000 per month to break even. Once I questioned him about his costs it was clear that this figure was closer to £15,000 per month. In view of the time that it takes to build a business such as this it was clear that the director never had the funds available to provide the working capital that was needed whilst he built it up to this level of turnover.
4. The director did not seek any advice before he started off. An hour with any accountant, or other suitably experienced professional (such as an insolvency practitioner!) would have helped him immensely and may very well have saved him from spending his lifetime’s savings in such a comparatively short period.
• Know who your market is
• Have enough working capital to finance the business whilst it grows
• Know your costs
• Seek professional advice