Around 40% of start-ups built in the UK are destined to fail, so what can we do to reverse this trend? A common denominator often shared by failing businesses is a lack of financial literacy and a minimal understanding of the early warning signs of insolvency.
This information must be embedded into every business playbook, as without this knowledge, a company’s financial health can deteriorate and cause the foundations to crumble.
Teething problems, occasional cash flow hiccups, and unpredictable income are often customary during infancy. Once a startup finds its financial footing, secures its market position, and staples a consistent income stream, financial uncertainty should subside.
A lesson in financial literacy is instrumental for fledging business owners as it provides them with tools essential for navigating financial distress.
What’s the rate of insolvencies in UK startups?
In 2024, startups accounted for 46% of total company insolvencies – the lowest proportion in a decade by a large margin, despite record levels of company incorporations throughout the year, according to research from PWC.
Startup insolvencies persisted at 60% over the last decade, with rates finally falling under 50% last year. Business owners must maintain high survival rates by investing in financial security and contingency planning to shield against insolvency risk.
Startups are unique commercial entities as operations are often scalable, non-traditional and driven by innovation. As such, technology plays a primary part in the efficiency of a startup and should therefore be embraced to manage financial risk.
Adopting technology to manage financial risk
As the UK continues to be a hospitable breeding ground for UK tech startups, with London securing the top spot, startups must differentiate healthy competition from unhealthy competition to minimise exposure to needless financial risk.
Financial literacy plays an integral part in protecting a startup, which is where technology can also play a crucial supporting role.
Financial risk software is often used by businesses to perform essential due diligence checks on parties they wish to engage in business with. It also measures the level of financial risk exposed to the business and often tracks the first signs of insolvency, such as:
– Depleting cash flow, working capital and retained profits
– Significant drop in net worth
– Legal action, such as a winding up petition or County Court Judgment
– Unexpected interruptions to trade which may trigger permanent cash flow problems
Due diligence software screens businesses for such red flags and actively monitors their health journey, so if finances severely deteriorate, the startup is notified without delay so they can respond with caution.
This can avert serious bad debt risk that could otherwise eat into cash flow and reserves which can destabilise a startup.
If a startup reaches a stumbling block and suspects that their company is on a dangerous path with no point of return, they must seek immediate action. The balance sheet and cash flow tests for insolvency are simple checks used by business owners to check whether their company is insolvent.
They can help conclude whether a startup is battling temporary distress or major financial difficulty.
We draw upon lessons learnt from real-life cases where leading UK tech companies have collapsed because of poor financial risk management.
A cautionary tale – lessons learnt from the collapse of UK tech startups
Startups are often heavily reliant on investors to fuel the launch of their businesses, so when the going goes tough and the financial cushion falls flat, keeping the business operational may be unsustainable. If the startup commences operations in a debt-heavy position and pushes cash flow forecasting onto the backburner, financial distress can quickly go unnoticed.
Poor cash forecasting can lead to an unexpected income or funding drought, as seen with HyperTunnel. The modern construction startup once famed for its application of AI and machine-learning was unable to settle debts with its principal investor and subsequently entered administration after it failed to secure investment, seek debt restructuring or a business sale.
Overextending finances can cut short company growth, as if a startup grows at breakneck speed, however, fails to top up revenue streams, growth can quickly become unsustainable.
With access to funding becoming more difficult under worsening trading conditions, Manchester-based flexible working startup, Orka, closed its doors after failing to secure funding. Twig, a circular economy fintech, experienced a similar fate earlier last year after it failed to successfully complete Series B fundraising.
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