She says that had she not experienced the failure, she might never have gone on to write one the worlds’s most popular series of books.

JK Rowling’s most memorable quotes, taken from the video, include

I talk about the benefits of failure – simply because failure means a stripping away of the inessential – I stopped pretending to myself that I was anything other than what I was and began to direct all my energy into the only work that mattered to me – the one arena in which I truly belonged – I was set free…

it is impossible to live without failing at something unless you live so cautious you might as well have not lived at all – in which case you have fail by default.

The knowledge that you have emerged wiser and stronger from set backs means that you are, everafter, secure in your ability to survive.

You will never truely know yourself until tested by adversity. Such knowledge is a true gift and it is worth more than any qualification won.

Rock bottom was the solid foundation on which I rebuilt my life.

What can entrepreneurs learn?

Firstly, failure is a part of life and a part of business life. It might be small – you missed out on a contract or sale. Or it might be bigger – your business fails. It might affect your marriage and it affects your finances and the car you drive (or perhaps, for a few years, you just walk).

Secondly, to avoid failing, means taking no risk at all – so means could never achieve anything thing and therefore is failure by default.

Thirdly, having experienced failure, whether small or great, the opportunity is to use it to strip away the inessential parts – to know yourself and focus on what you do brilliantly.

Only when you know what you can do brilliantly can you truly be successful.

Hence, failure is the rock on which all future innovation and long lasting success is based – just as JK Rowling said.
Thirdly,

Google Chief Exec, Eric Schmidt say ‘we celebrate our failures. This is a compnay where it’s absolutely OK to try something that’s very hard, have it not be successful and take learning from that’.

An early innovation that got replaced?

Stock investors have rediscovered Warren Buffett’s investment principle of ‘never lose money’ and entrepreneurs are now focused on how to avoid small business failure, rather than searching for growth at all costs.

So have we all become neg-heads? Not at all, instead there is a new realism to what it means to grow a successful business and that it all begins with understanding business failure and how to avoid it so that your business has time and space to innovate.

Okay, so what are the 5 ways to avoid small business failure?

1. Take no debt 

Debt ties you down and stops you being flexible. However, in my experience, the worst problem is that it encourages entrepreneurs to hold onto a business idea that isn’t going to work and it stops them looking developing that idea into something that can make money.

For most entrepreneurs, debt involves putting up prized assets, such as a home. This then involves your partner or family (most probably) in the outcome of your business and they too become emotionally attached to your business idea not failing.

Strangely enough, taking debt removes your freedom to fail and the learn from that business failure – because something as important as your home is on the line. Don’t do it – give yourself time to fail and learn from business failure – this is the only way to create a truely unique product, service or business.

2. Make your costs as flexible as your contracts

Next up – costs! These are a big issue in the early days because whilst customers and clients may buy from you once, there is no guarantee that they will buy again.

Equally, in a tough economic climate, most businesses will not provide a contract but want to buy your services on a drip feed or bit by bit basis. In this case, if you lose a contract – or it simply isn’t renewed – then you need to be able to adjust your costs just as quickly. This means – no fixed costs!

Examples of fixed costs include permanent staff (but not freelancers, and you can now advertise freelance jobs free), office space, cars and phone contracts. None of this necessary. So why do so many entrepreneurs make this mistake? Well, somehow having an office to go to, or a car to ride in gives a new entrepreneur (or ex-student / ex-employee) a feeling of comfort. So fight the feeling! 

I can tell you it is far more comfortable to know you can pay your bills than have a soft expensive chair to sit on.

3. Take no partners nor shareholders

Partners and shareholders require rules – lots of them.

The rules need to cover how the business is governed and run, how the money gets spent, who gets the profit and salaries and what happens when it goes wrong. Sound simple? It isn’t. 

Imagine setting up a government – democratic-ish – where some people have more votes than others – on a small island and then you’ll have some idea of the complexity. Imagine that as the island becomes successful it grows, more land, more people (some with votes, many without), a few ambitious barons and yes, you have idea of the increase in complexity that follows initial success.

Now, many small businesses take on partners to dish out shares because at the outset when they are worthless. Well here is the bad news, as soon as the business is worth something, then you’ll need all the rules and constitution of a small island.

Yes, after an intial success, your business will almost certainly fail if, for instance, you have some partners or shareholders on a free ride whilst other are working their socks off.

Of course, if you are raising 10m GBP or US Dollars, then you’ll need partners, shareholders and a constitution – but at least you can now afford the lawyers to set it up and run it correctly. Anything else is a massive distraction to be avoided like the plague.

4. Reward people for great work with more work (not profit share, stock options)

Okay, mistake number four; you’ve got your partners and handed them large chunks of shares, now you’ll be thinking about giving more shares to your employees. C’mon, this does not make sense.

You reward great work by paying on time and a renewed contract. Simple. Why pay a second time in the form of share options?

Share options distract your team from growing the underlying value of the business and encourage them to see a quick sale on a hyped up valuation. The result? The business will take on massive risk in order to grow as fast as it can whilst also massively increasing the risk of out right business failure.

Of course, the option holders don’t lose out if the business fails, they just move onto the next opportunity. It is the original shareholder(s) who lose out. Therefore, the incentives of a shareholder / founder and an employee on a stock option deal are in conflict and yes, poor decisions/ risk management is what you’ll end up with. This is a recipe for failure not for success.

5. Don’t forget – it is all about product, price and perception – nothing else matters

Hopefully, you’ll now be ready to buy into the idea that debt, fixed and inflexible costs, shareholder partners and stock option incentives are a route to business failure. The essential problem with all of these is, that whilst they can all be resolved by patient management, they are a huge distraction from what really matters – product, price, perception and the sales that come from that.

Now, partners, shareholders, fixed costs and share options all have their place in large or very large ventures – or those that are funded by Venture Capital. They just don’t have a place in small, innovative start ups.

So, the biggest cause of small business failure is the inability to focus on what your business does.

So, focus on price – that means, deliver the best price whilst producing a profit and constantly drive your costs per product down so that you remain competitive and can grow. Equally, a program of constantly enhancing and improving your product is critical too.

Customers will stay with you if they see the product they buy gets better – whilst the price remains static / low or even better, falls. Lastly, this will allow you to concentrate on the perception your customers have of your business and your products and services. Now, you may think this is about marketing, and it is, but not big advertising and promotional marketing. Instead, it is all about how your customers – current, previous and future – think about your business, products/service and customer service.

Another way to think about this is to simply call it innovation. You need to innovate, constantly and re-invent your business, products and services. Look, great pop stars such as David Bowie, Madonna etc have done it all their career. You need to do the same.

Conclusion?

So, the cause of small business failure is largely down to an inability to focus on what matters – product, price and perception – which is often caused by a mix of debt, rigid costs, partner/ shareholder complexity, share options.

This ability to innovate around your business or technology or what ever you do is the key and is the result of being able to avoid the key reasons for small business failure.

So, let’s learn from these mistakes. Innovate and avoid these things and focus relentlessly on what matters.

Are you wasting money? But more importantly, missing out on talent?

Dear successful entrepreneurs,

Here is my warning…

Just remember if you do employ traditionally (and ignore the freelance model), here is what you will be paying for sooner or later.

• paying for stationery to make your employees feel comfortable and valued
• paying for storage to store the excess stationery they order
• paying for staff to file bits of paper in the endless lever arch folders they felt they needed in order to do the job
• paying for someone to reduce the filing and throw away the useless information stored
• paying for an intranet to allow triplicate filling of digital copies of all items filed
• paying for server costs to allow maintenance of digital files
• paying for someone to go through all the digital files and delete them all

and then

• paying to provide email support when staff break their email accounts
• paying to stop your staff doing silly things, like downloading viruses or looking at pornography
• paying for human resource staff to listen to their whinges
• paying staff to smoke cigarettes
• paying managers to provide written staff objectives which staff can then safely ignore
• paying staff to have new ideas on how to do things better, which ultimately don´t work and then paying someone else to take down the new idea and get on with doing it the way it works best

and then

• paying for staff to have grievance procedures which can be brought against any managers whether legitimate or not – all payable out of company time and resources
• paying for senior management to sit listening to pointless complaints
• paying for someone else to wash up the mugs that staff use and don´t wash  up (do they do that at home?)
• paying for the tea and coffee
• paying for someone to clean up behind them
• paying for management to regularly walk around the office to ask staff to please throw away old paper, bits of sandwich left-overs and old newspapers and magazine

and then the obvious stuff

• paying for holidays
• paying for sick leave
• paying whether they do their job properly or not
• paying to hire staff (recruitment fees)
• paying to hire the temporary replacement when on maternity or paternity leave
• paying for someone to fill a key role during maternity
• paying to make weak staff members redundant because firing average performing staff is too long winded and every business opts for the more expensive but quicker route of redundancy
• paying for holiday rights accrued whilst on maternity leave (whilst also paying the person who fills the maternity role the same holiday rights)

and then

• paying for an internet connection to allow them to keep on surfing whilst in your office
• paying to post personal letters and provide their homes with a suitable supply of pens
• paying for mobile phones and laptops so staff can work from home on Fridays and have a nice long weekend

Okay, you think I’m being a little extreme? I promise you, I have seen all of these in the business I created and it was a problem of employed staff and never an issue with freelancers and contractors.

I do accept that if you have contractors in your office, which you will almost certainly want to do, that you will have to pay for their office space too and provide tea and coffee etc. You may even pay them slightly more such that there is no real National Insurance or employers tax saving (it might just get paid to the freelancer to allow him to cover these costs himself).

However, in my recent business which ceased training in Aug 09, I did not encounter abuse of these or any of the other issues with freelance and contracting staff; only with the traditionally employed.

The point here is not that using freelancers and contractors is primarily about a tax saving – although it may a secondary benefit – it is that you have a different grown up relationship with fellow business people who share your desire to make the project work.

And, you have the minimum of distraction from achieving the goals of the project because you do not have the bureacratic and overbearing risk of employment law hanging over every decision you make like the sword of Damocles.

Do you know the story of Damocles? It is worth knowing and no, you don’t want to be Damocles.

Instead, if you are an entrepreneur build a business which stays true to its founder – entrepreneurial. Build a business that is exciting and focused on achievement of goals and objectives and the fun and enjoyment that comes with that.

Find the best freelance and contractors you can. Pay them well, pay them fairly and a bit more. Share bonuses with them if you have financial success. Create an atmosphere of business partners working together to achieve win/win results.

You will have more fun, your team will have more fun, you’ll all perform better and you’ll all get better results. And yes, you will save money too – but this isn’t about saving money – it is about creating the right atmosphere in which success is most likely to flourish.

Be brave and do it and don’t compromise. After all, you do call yourself an entrepreneur don’t you?

Asked the question, “what advice would you give a young graduate entrepreneur looking to start out in business“, he shared three key and controversial principles from Rags to Wreckages;

• take no debt – find ways to build a business without debt (this is how the internet can help)
• employ no one - use contractors, freelance etc but don’t write employment contracts that accrue liabilities
• follow your passion – you will only be successful if you deliver excellence and for that you need to follow and stick to your passion

Testimonials from the evening which was sponsored by Best of Chester, include:

“This was certainly a thought-provoking event.  Mr Lewis was an excellent speaker, imparting valuable advice based on his first-hand experiences”

Chris Pyke, Head of Chester Business School

“very thought-provoking and useful for me as a business owner”

Simon Yates, Yates & Co Financial Planners

“It was fascintating to hear some of Neil’s Rags to Wreckages views, particularly regarding keeping debt low, contracting workforce and the evolution and learning process. All common sense things, but attributes that are rarely considered, probably because they are so obvious.”

Darren Mercer, Mercer & Associates Wealth Management Ltd