Small Plans To Take Off
Sydney Morning Herald
Saturday November 13, 1999
Going into business for yourself is tough, so it pays to be strategic.
Sick of the nine to five grind? Feel like you will never get ahead financially while you are stuck in the PAYE rut? Starting your own business may be the go. But it is not a decision that should be entered into lightly.
It probably seems like a good way to create wealth. But we've all heard those frequently quoted statistics about small business failure rates, so obviously there is an element of risk. But if the risk pays off, you could be on your way to success.
Aub Eardley, executive officer of the Botany Bay Business Enterprise Centre, doesn't believe failure-rate statistics should negatively influence the decision to start a small business. But he believes that it should influence the way you go about it.
David Young, head of small business with Commonwealth Bank, says those looking to go into business for themselves need to know their market. "Make sure you can generate revenue from the market," he says.
And all those interviewed agree, the one common characteristic of successful business start-up, is that they have a comprehensive business plan.
"Ensure you have a strong business plan that looks at demand for the product or service, the competitive advantage, and that it includes all the principles of business planning," says Young.
Peter North, a judge with the NSW Enterprise Workshop Business Plan Awards, says, "Without a business plan you haven't the first idea about what to do along the way."
North says small business people are likely to run into unexpected difficulties, and that
it is those that have got a good plan who are able to deal with them effectively.
"You need to think through what kind of business you are in? What are your competitors like? How do you position yourself against them? You have also got to understand that time is money," he says.
The longer it takes you to set up, the more it will cost. But above all, to be successful you have got to be credible.
"If you turn up at the bank looking for an overdraft or if you are looking for other people to invest in the business you have got to be credible," he says.
"Having a good idea or invention is a very small part of being successful. It takes quite a lot of work and money to put it on
the market.
"The Government's statistics tell you that the vast majority of small businesses fail. It is a matter of thinking the plan through."
You also need to think through
the funding of your business,
says Young.
"Make sure you have sufficient funds to set the business up and enough to live on," he says. And be sure to have some contingency money set aside.
"With start-ups, the ability to obtain bank finance depends on the business plan, and the person's net worth - the person's financial footing and assets."
But, depending on the size of your business, if you can't get finance there are other options. Incredibly, he says, "depending on the size, some people fund a small business start-up on a credit card."
"Other alternatives include increasing the home loan and using redundancy or early retirement funds. Others look
to an equity partner," he says.
Ultimately, how successful you are depends on how you manage the cash flow, Young says.
"Know your expenses now and those that are due. You might be flat out working, but your debtors might be taking longer to pay.
"Debtor management is important. If you have a loss on a substantial debtor it could wipe out your net worth."
And above all, don't grow
too fast. "It is a temptation,
but make sure you can fund
that growth."
If the aim of the business is to create wealth, you need to have an exit plan outlining how you will eventually access that wealth.
"If your retirement funding and style of living is to be funded through the success of the business, you need to know how to get that money out of the business," says Young.
"You need a really good succession plan . . . and to
know when you want to exit
the business."
Succession planning doesn't just mean thinking of a way of passing on the business to kids. It is working out how you will exit the business. "Circumstances will dictate the need for succession planning," says Eardley.
"It depends on what your original goals were.
"One of the reasons a lot of small businesses start is
because people buy a small
run-down business, build it up and then they sell it.
"It is worth noting that
many small businesses are sold after five years of people
working in it, building it up and then selling it and taking the capital gain."
"Many small businesses are purchased and built up with the specific intention of selling," Eardley says.
It is also important to plan for contingencies. Brett Himbury, general manager of national distribution with Westpac Financial Services, stresses the importance of building up wealth that is separate from the business.
"It's important to diversify and create wealth outside as well as inside the business," he says.
"Think about all those businesses that don't survive. If you put all your wealth into the one business and fail, not only do you have no business, but you have no wealth."
It is an issue even for successful businesses, says Paul Martin, managing partner of The
Profit Foundation (www.profitfoundation.com.au) and senior visiting fellow at
the Australian Graduate School
of Management.
He says there is a belief that there is a correction between a successful business and personal wealth. "That is a dubious correlation. There are a myriad of businesses doing quite well and the owner is living on borrowed money," he says.
"They are unable to convert
the success of the business into personal wealth. From day one you should separate personal wealth from
the growth of
the business."
Martin suggests that
for each dollar of sales the owner
has a strategy of putting 1c aside
for investments.
It doesn't sound like much, but he says:
"If all business people could achieve that they would be
going brilliantly."
For long-term wealth, Himbury says it makes sense to save through superannuation. "This is protected against bankruptcy." So if the business fails, the money in your superannuation fund cannot be used to pay creditors.
Himbury also stresses the importantance of seeking advice - not just on taxation but on technology, legal aspects and financial advice.
It's also important to remember to protect your assets "remembering that assets cover three areas," he says.
"Key person protection, that
is yourself. Key people
protection, and protecting the physical assets."
Young agrees: "Life insurance and loss of income insurance are all part and parcel of a risk management strategy."
He adds: "The Government changes in terms of capital gains tax on the sales of business is a big boost for business."
The changes mean, among other things, that small business owners who sell an asset that they have owned for more than 15 years to retire, and are over the age of 55, do not pay capital gains tax.
Another positive change
from the Government is that people no longer have to pay provisional tax, says Rob Bastian, chief executive of the Council of Small Business Organisations
of Australia.
On the downside, he says the GST will be an added burden for small business in terms of compliance. "The new system of taxation means you have to make tax payments every quarter instead of every year."
Bastian suggests businesses that
are starting up now should
start out thinking of the way the system will work post-GST.
He doesn't get too caught up
in the so-called failure rates
of business. "People might not appreciate how important small businesses are," he says.
In all, 60 per cent of net job growth comes from small and start-up companies.
"People don't pay staff out
of their pocket. They pay staff out of profits," Bastian says.
"The burnout factor in
small business is high," he concedes. But this should not be surprising as people have gone in and built the business from zero. He also points out that when someone sells and ceases to trade and rolls the business over from one owner to another, it can confuse the statistics.
"Without a doubt, businesses fail. But there are very few billionaires walking around
that haven't gone bust at some point," Bastian says. "I am extremely sceptical of those
80 per cent that fail in the first
18 months."
But even if you start your
own small business and don't
do so well, he points out: "If
you dive in, find it tough and make a tactical withdrawal, it might even make you a
better employee."
DEFINITION
Provisional tax
A tax paid in advance of when it is incurred. It is levied when your non-salary income is more than $1,000 in a financial year, or if your tax instalments in the past year fall short,
by $3,000, of what
was required.
© 1999 Sydney Morning Herald