Posted by Dan Martin, AccountingWEB business editor
I attended a small business event in Bristol this week where an emotional Rachel Elnaugh related the story of how her gift voucher business Red Letter Days hit the heady heights of turning over £14m a year only to come crashing down with debts of £5m.
The entrepreneur and former panellist on the BBC's 'Dragons' Den' has to be admired for her passion. Even though it's two years since the company, which sold experience packages such as motor racing trips and luxury hotel weekends, collapsed, talking about it on Tuesday evening still brought a tear to her eye. She also displayed obvious feelings of anger when relating how before the company went into administration, Barclays blocked access to £3m of Red Letter Days' money to cover its "perceived risk".
So where did it all go wrong?
Elnaugh admits that it was her decision to step back from the company by appointing a "proper CEO" and taking on a non-executive chairman role that led to its downfall. Unfortunately for Elnaugh the business overexpanded and overspent and without a strong enough finance director in place to sort out the mess, she was unable to save it from collapse.
Losing control of a company is the reason behind the downfall of many an entrepreneurial operation. However, stepping back from your business may not necessarily be a bad thing. Elnaugh was probably right to make external appointments as the point at which a company goes from a small to medium is often even more difficult than the start-up process itself.
It is important for most entrepreneurs to accept that while in the early days, their company was able to thrive with them running things on their own and making all the decisions, if it is to grow beyond the start-up phase a more structured approach is necessary where responsibility is delegated to a new tier of management.
Rachel Elnaugh did that but what it seems she didn't do is remain involved. That is the challenge. Some entrepreneurs may be perfectly happy to step back and put complete trust in their company's new leadership and collect the profits at the end of the month but that can often result in disaster.
Introducing a more structured management structure can deplete the original entrepreneurial spirit that originally pervaded the organisation so it's important that business founders keep the enterprise spirit alive by involving their probably now larger workforce in the business.
With profits likely to be increasing at a faster rate in a larger business, it may also be necessary to take on the services of a finance director, at least in a part time capacity, to make sure overexpansion and overspending – the factors which brought down's Elnaugh's business – don't occur. Introducing a system of internal checks and reporting will also allow entrepreneurs to keep their eye on operations.
All of this should not put anyone off from setting up a business of course. As Elnaugh found in the 16 years during which she ran Red Letter Days much success can be achieved but going in with your eyes open and not getting carried away means that you won't lose control and you won't lose your business.