Managing a Small Business in Australia: The Complete Handbook

By John English and Babette Moate

A complete update and expansion on the classic How to Organise and Operate a Small Business in Australia—essential reading for anyone who wants to build their future in small business No matter how talented you are, no matter how hard you work, a ready reference to essential small business skills is your roadmap to prosperity. This is the handbook that explains how to run your own business, from the author of the bestselling How to Organise and Operate a Small Business in Australia. Discover what it takes to get started, where you can go for help, how to generate sales, how to plan your operations, and how to handle your finances. If you want to start your own business, this book will be your guide. If you are already in business, this book will help you refine your operation and maximize your profits.

• Language: English
• Publisher: Allen Unwin
• Release date: Dec 1, 2010
• ISBN: 9781742690636

John English

John English is a contributing editor of Woodcraft Magazine and a former editor of Today's Woodworker. His work has appeared in numerous woodworking magazines, including American How-To, Fine Woodworking, and Woodshop News, and his syndicated how-to and home repair columns have appeared in newspapers across the United States. He is the author of The Building Buddy, Toys & Accessories, Woodworking Essentials, and Workshop Projects. He lives in Casper, Wyoming.

Book preview

Managing a

SMALL BUSINESS

in Australia

Managing a

SMALL BUSINESS

in Australia

the complete handbook

JOHN ENGLISH

& Babette Moate

disclaimer

The information contained in this book is to the best of the authors’ and the publisher’s knowledge true and correct. Every effort has been made to ensure its accuracy. Neither the authors nor the publisher accept any liability for any loss, injury or damage caused to any person acting as a result of information in this book nor for any errors or omissions.

First published in 2010

Copyright © John English and Babette Moate 2010

All rights reserved. No part of this book may be reproduced or transmitted in anyform or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act.

Allen & Unwin

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Australia

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Cataloguing-in-Publication details are available

from the National Library of Australia

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ISBN 978 1 74237 354 6

Typeset in 12/14.5 Minion by Midland Typesetters, Australia

Printed and bound in Australia by Griffin Press

10 9 8 7 6 5 4 3 2 1

Contents

Preface

Part A Getting started

1 Pathways to a start-up

2 Business strategy

3 Legal obligations

Part B Getting help

4 Government assistance

5 Private sector assistance

Part C Marketing plan

6 Marketing strategy

7 Generating sales

8 Export marketing

Part D Operations Plan

9 Establishing premises

10 Operating strategy

11 Employing staff

Part E Financial plan

12 Financial information

13 Working capital

14 Sources of finance

15 Taxation

Preface

A business is regarded as small if it has fewer than twenty employees. According to the Australian Bureau of Statistics, there are nearly 2 million small businesses in Australia. About 1.7 million are micro businesses that employ less than five people. In fact, nearly 1 million micro businesses have no employees at all. These figures demonstrate that a huge number of Australians choose to work for themselves and the majority of these businesses are very small indeed.

When you buy a new car you expect to get an owner’s manual that tells you how to operate it. The purpose of Managing a Small Business in Australia is to provide you with a practical explanation about how to organise and operate your own small business. It consists of five parts:

• Part A is concerned with how to get started. It focuses on the pathways to a start-up, developing your business strategy, meeting your legal obligations and why you should have a plan.

• Part B describes how to take advantage of sources of help and assistance. It explains how to access Commonwealth government programs, state and territory government programs and help from the private sector.

• Part C explains how to formulate your marketing plan. It examines the building blocks of your marketing strategy, how to generate sales and how to export to other countries.

• Part D guides you through elements of your operations plan. It shows you how to select your premises, provides examples of operating strategies for service, retailing and manufacturing businesses, and looks at important aspects of employing staff.

• Part E presents the essential components of your financial plan. It shows you how to use financial information, how to manage your working capital, how to look for sources of finance and how to comply with taxation legislation.

If you are standing on the sidelines and tempted to go into business, this book shows you what is involved. If you have decided to take the plunge, this book will help you get started. If you are already in business, this book will show you how to get the most out of your hard work. And if you are still searching for a business opportunity, then you might also like to read Discovering New Business Opportunities by the same authors.

Part A

GETTING STARTED

1 Pathways to a start-up

2 Business strategy

3 Legal obligations

1 Pathways to a start-up

Small businesses are frequently in the hands of men and women who are the rebels of the business world. They have a highly developed sense of independence, or at least a strong desire to be independent. They have a strong sense of enterprise, or at least a desire to put their own ideas and capabilities to effective use. And they often have a strong dislike of conformity and routine. There is tremendous diversity in the types of small businesses and even greater diversity in the characteristics and motives of the people who own and operate them. The purpose of this first chapter is to consider the pathways to starting your own business. First, we look at the pros and cons of self-employment and what it takes to get on the launch pad. Then we examine the three main pathways to a start-up including buying a business, buying a franchise and starting from scratch.

Pros and cons of self-employment

Competition is a reality in the Australian business environment, particularly with low barriers to entry for many kinds of small businesses. A consequence of competition is that successful businesses have to be efficient. Customers will patronise efficient businesses rather than their inefficient rivals. The efficient firms flourish and the inefficient ones go out of business. In this way, competition results in success and prosperity going to those firms that best serve their customers. However, engaging in competition means you must honestly face the fact that running a small business can be one of the toughest ways to make a living. Before you decide to take the plunge, think seriously about some of the advantages and disadvantages of self-employment and whether this is a way of life that genuinely appeals to you.

Advantages

• You can be your own boss, you can be independent, and you can exercise your own talents and capabilities.

• You will have the chance to make money, maybe even a great deal of money, and you will not be dependent on a fixed wage or salary.

• You will have the opportunity to achieve a feeling of personal worth, accomplishment and recognition.

• You can develop your own ideas, products and services.

• You will be able to work at something you enjoy by doing personally satisfying work and perhaps succeeding where others have not.

• You may achieve economic security for yourself and your family.

• You may be able to provide something of value to the community.

Disadvantages

• You can fail and lose your money as well as the money your friends or relatives may have invested in your business.

• Many small business operators work long hours, which means that time for family and friends can be difficult to find.

• Your income may be uncertain and sometimes it could fluctuate enormously as a result of factors that you cannot control.

• You will face the unrelenting pressure of having to make decisions and solve problems that call for expertise that you may not possess.

• You will still have a boss—in fact, you will have many bosses including customers, suppliers, government agencies and your banker.

• You may eventually hate your business in the same way that other people hate their job, and you may find it difficult to get out of your business without incurring an unacceptable loss.

Getting on the launch pad

The reasons that entice people into a small business vary enormously. However, most individuals typically proceed through a similar sequence of events before launching into business. If you think carefully about each step, it may help you to clarify some of your ideas about becoming self-employed.

Examine your motivation for going into business

Although thousands of new businesses begin each year, owning and operating a small business is not for everyone. The decision to become self-employed needs to be based on a realistic evaluation of your personal objectives, your skills and experience, and your personality. If you go into business without an honest evaluation of your motives, then you run the risk that you will find yourself unhappy and disillusioned.

Choose a business that suits you

The type of business you choose is a highly personal matter. Factors to consider include your skills and experience, your talents and your interests. Experience plays a big part in understanding the market and avoiding costly mistakes. If you have a particular passion, then you may want to choose a business that capitalises on it because it will help to sustain you through the long hours and hard work.

Evaluate the feasibility of your idea

Having examined your personal motivation for going into business and chosen an exciting possibility, you will probably be anxious to get started. However, a common mistake is to blindly rush into business without adequately evaluating the feasibility of your idea. Is there enough demand for what you want to sell? Have you done some market research or are you just guessing? Can the business generate enough cash to pay its expenses and leave you with a profit? How long can you keep going if it doesn’t? Do you have enough money to get started? If not, can you realistically expect to be able to borrow money? What is the worst thing that can happen if the business fails? Can you cope with this possibility if it occurs?

List all your start-up requirements

There are many things that need to be done before you can actually get started. Here are some examples:

• Establishing a legal entity and registering an Australian Business Number

• Identifying suitable premises and negotiating a lease

• Finding out what permits, licences, rules and regulations apply to your business

• Locating suitable suppliers and negotiating supply agreements

• Determining what type of records you need to comply with the reporting requirements of government agencies, including the Australian Tax Office

• Identifying the risks for which you are responsible and what you need to cover by insurance.

Many mistakes can occur during the start-up phase that result from making assumptions rather than researching the facts. Here are some of the errors you should try to avoid:

• Thinking that others, like your accountant, mentor or the state small business agency, will do your planning for you

• Entering into an informal, verbal partnership that later becomes unworkable because of misunderstandings about money, family interference or disagreements about work responsibilities

• Paying licences and other fees or entering into contracts such as a lease before being certain that there is enough money to start the business

• Discovering that everything costs more and takes longer than you expected.

Do a business plan

A simple business plan contains your strategy for the development and operation of your business. It is a blueprint for making the transition from your initial idea to a successful enterprise. It results from research, deliberation and a vision about what you want to achieve. It is your strategy for creating a competitive advantage and exploiting it. A business plan identifies the characteristics of the market and the marketing strategies you will employ. It includes plans for the facilities, staffing and procedures to operate the business, together with financial forecasts of the expected profits and cash flow. Having a plan means you have taken the time to think about your business and you are prepared to put it into operation.

Buying a business

When you buy a business, you get what someone else has put together. You are buying the location, premises, equipment, stock, customers, staff and goodwill that have been established by the seller. That can make it much easier for you to get started, or you could be buying a big mistake if the seller’s original decision to start the business was not justified or badly executed.

Advantages and disadvantages

Buying a going concern has the initial advantage that you will not only receive immediate income from sales to existing customers, but you will also save the time and effort needed to equip and stock the business yourself. A successful business will have a proven location, established relationships with suppliers and creditors, and existing employees. Buying a going concern as a package may turn out to be cheaper than trying to assemble all the bits and pieces yourself. It is also simpler to finance a single purchase transaction, and a proven track record will be a significant advantage in persuading a financial backer to support you. When you purchase a business, the risk of failure is significantly less than if you tried to start the same business from scratch.

There are also potential disadvantages if you buy a business. Initially, you are stuck with the previous owner’s bad decisions. For example, the inventory may be unsaleable, the choice of equipment and fixtures may be outmoded, some of the staff may not be suitable, or the location may be poor. You could pay too much for the business if you misjudge its value, and there could be unexpected expenses if the business turns out to be run-down. If the previous owner had a bad reputation, then you are likely to inherit ill will among customers and poor morale among staff. Visit the business a few times before you identify yourself as a potential buyer to check out the operation under normal trading conditions.

Valuation

When you buy a business, the price you pay should be based on its potential to earn a profit in addition to what you could earn by working for someone else. The first step is to ask your accountant to analyse past financial statements and income tax records. Have sales and profits been increasing or decreasing? What will be the return on your investment? You can use the information in Chapters 12 and 13 to help you with an analysis of the seller’s financial information.

If possible, obtain an industry profile for this type of business. A comparison of the seller’s figures with an industry profile will uncover any material discrepancies that need to be explained. This also helps you discover any operating problems that may affect your decision to buy the business or what you are willing to pay for it.

There are two basic methods used to determine the value of a business. The first method is based on expectations of future profit and return on investment. It is called the capitalised value method. The second method consists of valuing the business on the basis of the appraised value of the assets.

CAPITALISED VALUE

Capitalised value is the amount of money you would need to invest at your required rate of return in order to earn an income equal to the profit potential of the business. The required rate of return is called the capitalisation rate. Capitalised value is found by dividing the annual projected profit by the capitalisation rate. For example, suppose a business is capable of earning $50 000 per year after paying all of its expenses including your own salary. If the investment in this business is as safe as a bank deposit, you could use the fixed deposit rate of about 5 per cent to capitalise the profits and arrive at a value for the business of $1 000 000.

No small business, however, is as safe as a bank deposit. Capitalisation rates ranging from 20 per cent to 50 per cent more realistically recognise the risks in a small business. If we use a capitalisation rate of 25 per cent for this business, then its capitalised value is $200 000.

Two factors are important in determining capitalised value. First, it is very sensitive to the capitalisation rate used. Be sure that you use a capitalisation rate that fully reflects the amount of risk involved in purchasing the business. Second, keep in mind that you are valuing long-term profits. If there is a chance that the profits will not be sustained over the long term, then you need to increase your capitalisation rate to compensate for this risk.

APPRAISED VALUE

Some small businesses are purchased on the basis of the net value of the assets to be transferred. This process consists of establishing what assets are going to be transferred and appraising their current market value. Generally, the assets are inventory, fixtures, equipment and goodwill. If the business sells on credit, you need to consider whether or not you want to take over the accounts receivable. Since none of the assets is likely to be new, take their remaining useful life into consideration when you value them. It is important to be sure that fixtures and equipment are serviceable, inventory is saleable and accounts receivable are collectable.

If the asking price is greater than the value of the assets, the difference is an intangible asset called goodwill. Goodwill represents the ability of the business to earn greater profits than if you started the same business from scratch. The value of goodwill should not be any greater than the difference between the capitalised value of the business and the value of the assets. Agents and vendors are always quick to claim that a business’s goodwill justifies a higher price. However, few small businesses that are put up for sale are genuinely producing extraordinary profits, so the problem of valuing goodwill is not usually a pressing one.

Negotiation

The aim of the negotiation process is to agree on the terms of a formal contract covering the details of the purchase. There are a number of matters over which you and the seller may have differences. For example, the seller is interested in the best price, getting paid as quickly as possible, favourable tax treatment on capital gains from the sale, avoiding any continuing liabilities associated with the business, and avoiding any contract terms that are not in their interest. You are looking for the lowest price, extended payment terms, a favourable tax basis for resale and depreciation, and warranties or guarantees from the seller that give you extra protection.

The central negotiating issue is usually price. What is actually paid for a business can be quite different from what it is worth. In other words, price and value are not the same thing. The price paid reflects the negotiating positions of the parties. If the seller’s desire to sell is stronger than your desire to buy, then the value you receive may be greater than the price you pay. This situation might occur if the seller needs to exit the business quickly because of age, health or financial reasons. On the other hand, if you are unable to raise enough money to purchase the business, the seller may offer to accept deferred payment if you agree to a higher price. In this case, you are paying a price that is greater than the value of the business in order to get vendor finance.

When you find the right business, try not to fall in love at first sight. An emotional decision may cost you dearly. Make sure you know exactly what the vendor is selling before you make an offer. Decide what the business is worth to you and be cold-blooded about negotiating the best price. Go back for a second look and a third look before you make an offer, then be patient and let your offer lay on the table until the vendor shows a willingness to negotiate.

Have your solicitor check to be sure there are no mortgages, back taxes or other creditor claims against the assets you are buying. It is not usually a good idea to assume any of the seller’s liabilities such as outstanding loans. Occasionally, however, these can represent a source of finance for you. If you do assume any of the seller’s liabilities, the amount must be subtracted from the asking price to arrive at a net price for the business.

A number of new problems will emerge when you ask your solicitor to exchange contracts. At this point, you and the seller will probably have reached agreement on price, assumption of liabilities and terms of payment. To protect your interests, however, your solicitor will advise you to include a number of other matters in the contract. What if the seller’s financial statements turn out to be inaccurate or false? What if the seller has undisclosed liabilities that have not been taken into account in arriving at the price? What if some of the assets that you are purchasing do not actually belong to the seller? What if substantial changes occur to the business between the exchange of contracts and settlement? What if the seller decides to open a competing business nearby? These questions reflect the uncertainty of your position as a buyer. It is important to get the protection you need formally written into the contract.

Buying a franchise

Franchising is changing the way many Australian small businesses are organised and operated. Franchising is a method of getting into business for yourself but not by yourself. Franchising may appeal to you if you have been unable to find a suitable business idea of your own or if you consider the risks of going it alone too great. Franchising consists of a relationship between a parent company (called the franchisor) and an individual operator (called the franchisee) in which the franchisor’s knowledge, market position and operating techniques are made available to the franchisee. In other words, a franchise is a pre-packaged business that you can operate under an agreement with a franchisor.

Advantages of a franchise

The support and expertise available under a franchise agreement represent a number of potential advantages over independent self-employment. These advantages are the main reasons why some people prefer to be franchisees.

REDUCED RISK OF FAILURE

A number of research studies suggest that franchisees have a better survival rate than other small businesses. Franchising cannot save someone from incompetence, but it does act as a safety net for individuals who are otherwise capable but need some assistance in getting started. In particular, franchises reduce the scope for making the types of mistakes that lead to business closure, because they represent total business systems that have already been proven.

OVERCOMING LIMITED EXPERIENCE

Another appeal of franchising is that it enables people with limited business experience to become self-employed. You can take advantage of the franchisor’s knowledge and experience that you would otherwise have to build up over a long time through trial and error. By having access to the managerial resources of a franchisor, you are able to reduce the uncertainty associated with starting a new business from scratch.

PROVEN MARKET