Thursday 21 July 2016 12:27 pm

Why most businesses never reach £1m turnover

Quick quiz: how many years does it take a half-million-pound business to cross the £1m mark if it grows at three per cent every year?

Answer: 24 years.

Why three per cent? It’s the dreaded Hindu rate of growth — just enough to keep pace with inflation — that many businesses find themselves trapped in.

Statistically, only four per cent of business owners ever reach the £1m mark, and only 10 per cent of those (that’s 0.4 per cent of all business owners) ever reach the £10m mark.

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Something is preventing more than 2.5m UK businesses from attaining that £1m goal, and that something can be traced back to how those businesses began: basically, not being Rumsfeld enough.

Starting a business requires no formal education or qualification, and an entrepreneur is likely to strike out on their own armed with little else than a (hopefully) great idea, passion and a set of skills from their previous life that may or may not be relevant to the business they intend to build.

The first year of the life of this fledgling business is the most critical. During this time, the rookie entrepreneur is focused on survival, their goals tend to be modest, and their successes are rarely stellar. Why shouldn’t they be fine with three per cent growth in year one?

But while that may be an acceptable beginning, who wants to wait 24 years to see real results? The trouble is, what allowed many entrepreneurs to run a successful small business simply cannot support larger teams and issues; further improvement and growth is too complex for them to handle and pursue. They’ve hit a complexity ceiling.

Which is where Donald Rumsfeld and torture of the English language with his known knowns/known unknowns/unknown unknowns come in. He — and Nasa before him, which is where the concept originated —recognised the importance of acknowledging and planning for what we don’t know. And what an entrepreneur doesn’t know, and how they go about identifying and filling that knowledge-hole is what separates a £1m-plus turnover business from an also-ran.

Whatever the product, whatever the market, every business needs to master communication. While most entrepreneurs understand this, what many fail to learn (or forget) is that businesses all over the world speak the same language: numbers.

Profit, Sales, Cash Flow, Receivables, Assets, Equity, ROI, Average Value Sale, Conversion Rate—a successful business person must not only understand these numbers, they must be able to leverage them for every decision made in their business.

In marketing, sales, team management and leadership there are key metrics to average, estimate and measure in order to evaluate the probability of effects and to justify decisions and calculated risks that will lead to sustainable growth. To break through the £1m mark, this is the language every successful owner must be fluent in.

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Understanding this language is essential at every stage of business, but it becomes vital as a business starts growing in size and complexity. And among the vital things an entrepreneur must grasp is that understanding numbers helps keep track of growth systematically, without having to do everything themselves, and that the relative importance of running their business as a business increases as they lose the ability to be personally involved in every activity the business undertakes.

If a business has been unsuccessfully targeting this £1m threshold for some time, and it keeps hitting that complexity ceiling, it might be time to review the techniques that have been used since its start-up days and consider making some major changes to the business’s decision-making process.

If it does reinvest in personal growth and learning it can help reach that £1m benchmark; perhaps within the year…