We quizzed ex-Dragon’s Den TV entrepreneur Rachel Elnaugh on the highly publicised meltdown of her business Red Letter Days, how she came out on top and why success is a state of mind.

At least 12,000 companies go into liquidation every year, but seeing your business collapse is not the end of the world – in fact, if you’re not failing, you’re not trying hard enough, says Rachel Elnaugh of Dragon’s Den fame.

Her new book Business Nightmares describes the catastrophic collapse of her business and how she picked up the pieces, plus the past business disasters of some of the world’s most successful business personalities including Simon Woodroffe, Doug Richards and Gerald Ratner.

She talked to Maire Bonheim about surviving a business failure and riding the storm as a small business in challenging times.

What’s the message behind the book?

It’s about coping with challenges in business and keeping face and optimism in really tough times. I think it’s quite a timely book given the unfolding financial crisis that everyone’s now in.

Does failure improve a person’s business sense in the future?

The interesting thing that I found writing and researching this book is that all successful entrepreneurs have experienced failure at some point in their lives, they just don’t always make a point of talking about it. So I think that failure’s the norm rather than the exception, and I don’t think it has to be a wipe-out situation. Failure can be a challenge and quite often people transform that challenge into even greater success. That’s quite an interesting message I think.

So your business has failed. What do you do next?

If you completely lose your business as I did, in one sense that’s quite a difficult situation, but on the other hand it can be quite liberating and can lead to all sorts of new opportunities. I think you have to accept that it’s part of your life’s journey and focus on what to do next rather than what you did wrong.

What do you think helped you survive Red Letter Days failing?

I’d been fighting to save that business for two and a half years and so when it finally went into administration it was something of a relief, not having to have to go into that battle every day. Because the meltdown was so high profile it was quite tough, but on the other hand it did actually lead to so many people asking if I’d like to getting involved in something different - one of those offers was the chance to write the book. So it’s quite interesting how out of every adversity comes opportunity.

Do you think it was more difficult having the business collapsing in the public eye?

It wasn’t very pleasant I have to say. Once the media has got their teeth into you it’s very difficult to control it; you have to just ride the storm and let them write what they want to write. One of the things I found most cathartic was to write my own blog, and actually using the internet to have my own voice and comment on things that might be written about me.

It’s surprising how many huge businesses successes have experienced failure in the past – why do you think that is?

I think failure is part of the course actually. It’s very easy to think that people who are successful have had a one way street to success, but actually when you look at the real story they’ve had loads of trials along the way. I think if you’re not failing in some ways you’re probably not trying hard enough. The only way to avoid failure really is to play it safe, and entrepreneurs don’t become successful by playing safe.

What surprised you while writing the book?

The key thing that was interesting was the kind of positive mental attitude that got people through it. I would say that success is much more a state of mind and an attitude than any sort of business skill – it’s about keeping positive and attracting the right kind of help, support and opportunities to get you through.

What are the most common reasons businesses fail?

The number one reason is cashflow, as we’re finding in the current climate with insolvencies up 17% year on year. You can have a hugely successful business but if you run out of cash it’s game over. So I think particularly in the current climate I’d say hold onto your cash and batten down the hatches.

So what are the most important things people starting new businesses should keep in mind?

I would say that if you’re starting in business it’s very easy to spend a lot of time focusing on offices and furniture and letterheads, but I think what you should be focusing on really is sales and deals, because essentially if you’ve got sales and revenue streams flowing then everything else is easy to sort out. But a lot of people spend a lot of energy doing things that are not related to revenue generation. It’s a very easy trap to fall into.

What would you do differently if you were started out again now?

Business has completely changed since I started out. When I started Red Letter Days back in 1989 we didn’t have mobile phones; I didn’t even have a computer. The internet has changed business massively. My own business now is completely virtual, I run it from home, I don’t have any employees and everyone is outsourced. I think that is the new way of business – you don’t have to actually herd 150 people into a head office in London, which was the old way of doing things, which I think is very outmoded now. I quite like the new wave of businesses which are hugely collaborative, like Facebook and YouTube, where actually the users are creating the content and they are doing the marketing. It’s a phenomenal shift in the way business is done.

Do you think the UK tax system should be changed to be more helpful to new businesses?

The thing is, most businesses actually don’t make any profit for the first 2 years, so it’s actually quite difficult. The key thing is to encourage investment in small businesses, because it’s incredibly difficult for businesses to get funding, and certainly when I started out in the Margaret Thatcher years at the end of the 80s we had the business expansion scheme which gave people 100% tax relief on funds invested and no capital gains tax if they made any money out of the invest. You could also set any losses back three years against other income. It helped small businesses hugely and it’s a shame there isn’t a similar scheme now.

Have you noticed the credit crunch’s effects hitting smaller businesses?

Absolutely. I did 3 business events in the past week and I asked the collective audience of around 700 people, who was having a good time in business where everything was going profitably. Only one person put their hand up, which I thought that was a telling indicator that every business at the moment is going through real problems. It’s impossible to get funding from banks who are trying to withdraw credit as much as they can and call it back, and I think consumers don’t have any money.

What do you think are the key elements of business success?

In the current climate, you absolutely have to control cashflow, cut down on overheads and focus on sales sales sales. It’s a challenging time and I think the next year or two is going to be incredibly challenging for businesses. But on the other side of that, I think there is potential for businesses which look at ways of servicing the needs of people in the current time. In any period of adversity there’s always opportunity if you look hard enough for it.

What advice would you give to anyone thinking about setting out in business now?

I would say follow your passion, because I see so many people trying to make money quickly, but I actually think the businesses which are most successful and fulfilling are ones where you follow your passion and create a business at the heart of which is something you love, because that will give you the natural energy to attract all the right people, opportunities and customers, because you will be living and breathing it. It’s a great gift to yourself to make it something you really love doing.

Business Nightmares, by Rachel Elnaugh, (Crimson Publishing) is out now, priced £17.99, available at all good book shops or directly from www.crimsonpublishing.co.uk