How to start a small

business

so, you want to run your own business? exciting times!

owning and operating your own business can be an incredibly rewarding experience. However, before you run out and start telling the town, it’s critical that you do some initial planning.

the following is an overview of the things to consider when starting up a new business, which will give you a broad indication of what is involved. in addition to what is covered here, you would be wise to enlist someone with the relevant experience to help guide you through the process.

we’ll take a brief look at the following:

why are you starting your own business?01

the business plan02

the structure03

back office04

how to start a small business 03

freedom and flexibility No more answering to the man! Whilst this is a perfectly valid response, starting your own business will be all consuming, especially for the first few years, and it may be some time before you are managing your empire Branson-style from your own private island.

brilliant idea

You’ve got a brilliant idea, the perfect solution, but have you thought about how you can market this idea? Who will want to buy it? Does another company already do something similar, or could they just pinch your idea with little effort? Is it able to be protected via a patent? How much demand exists for your brilliant idea? Is there any way to road test your idea before committing to it as a business?

get rich While for some, owning a business is a path to wealth, many small business operators work long hours for less than what they could earn working for someone else.

The next question is do you have the personal attributes need to run your own business? It’s important to be honest about your skills and abilities before setting up shop. Some key attributes of successful small business owners include: work ethic The hours will be long (at least to start with) and you may consider many of the tasks you’ll be faced with boring or beneath you. When you’re starting out you may not be able to afford to pay anybody to help. Are you willing and able?

The first question to ask is why do you want to start your own business in the first place? Some common answers are:

why are you starting your own business? 01

tenacity

You will get knocked down, but how good are you at bouncing back? availability Are you hoping to fit this in around a day job or study? What about family commitments? Starting your own business is a massive commitment so you’ll need to be realistic about your time – life won’t stop because of the business, but the business may well stop if you can’t put in the time. organisation Can you organise, prioritise and get things done? Successful business owners are typically very driven, organised, and effective. If you have a habit of “doing things tomorrow”, then this might not be the path for you.

communication Are you an effective communicator? You’ll be dealing with suppliers, customers, and eventually with staff – can you get your message across? Finally, do some back-of-the-envelope style calculations about the potential performance of your business. How much are you going to sell your product/service for? How many will you have to sell to make your revenue target (in fact, what is your revenue target?) After you factor in your costs, what is your return? Undertaking a warts and all assessment of your business’ viability at this early stage, could save you a lot of angst later on. After considering all of the above, are you still interested? I’ll assume you’ve said yes. Brilliant! Let’s move on to planning for your new enterprise.

how to start a small business 05

02

posters and put them up around the office as a constant reminder of what the business is here to do b) values

These are the guiding principles that state what your business stands for. They may come from your business model (e.g. making things in Australia), or they may simply come from your beliefs (e.g. honesty above all). Regardless of where they come from, they should inform all your future business dealings, and your business should become known for living by those values c) promise This is the promise your business makes to the customer. Setting reasonable expectations is a crucial part of running any business, so it helps to spell it out in the form of a brand promise which lets everyone who comes into contact with your business know what to expect – staff, suppliers, and customers alike.attributes of successful small business owners include:

d) goals What are you trying to achieve for your business? This will usually tie back in with your personal goals (e.g. to retire by 40 or to earn enough to holiday for 10 weeks a year). e) strategies

How are you planning on achieving those goals? It’s very easy to say you want to make millions, but planning exactly how that will happen is less straight forward. You should have strategies around customers, product, pricing, and competition, and the strategies should have a mix of short, medium, and long term time frames. f) business model In other words, how you plan to make money. Are you providing a product or service for a fee? Will you use a subscription model? Will you charge per transaction or by some other method? Include a

Planning is crucial with any venture and starting a business is no different. The business plan explains why your business exists, what goals you want to achieve, and how running your business is going to achieve those goals. It can also be an effective tool for showing others your business’ potential. The business plan should be a living document. You should refer to it regularly and update it constantly. It shouldn’t be parked in a drawer. Business plans come in many forms. Here are the main sections you’ll want to include in any plan. Pro tip – keep it simple!

a) mission This is a simple statement (1 sentence) that says why you are here. If you’re stuck for ideas, go back to the customer’s problem your business is seeking to solve. A quick internet search for examples can provide inspiration. Your mission statement should be motivational! It can help to have it made into

the business plan

how to start a small business 07

detailed description of the product/service you’re selling. What makes it special? How is it different from what else is on the market? g) team Include a description of the key roles in your business and who will fill those positions. It may just be you in all these roles to start with, but it is important to scope this out at the start. You should also consider who your professional advisers will be (e.g. lawyer, accountant, etc.). h) market Define who your customers are – where do they live? What do they like? How old are they? It’s very helpful to do some market research early on so you understand the size of your market and how you might access their wallets! Also, rigorously assess your competitors. Who are they? How do they operate and how is your product better than theirs?

i) swot Conducting a basic SWOT (strengths, weaknesses, opportunities, and threats) analysis of your proposed business is a great idea because it’ll force you to examine your idea from angles you may not have considered before.

j) marketing How are you going to inform your customers about your brilliant offering? What promotion activities will you undertake? Have you considered how you could use your website and social media? k) revenue projections How much of your product/service do you expect to sell? What price are you selling it for? What will total revenue look like in the first, second and third years of your business? A quick table showing this will help demonstrate the earning potential of your business. Remember that your revenue projections need to be based in reality!

l) cash flow forecast A simple cash flow forecast will enable you to map out your incoming and outgoing cash over the first year or so. This means you’ll know how much cash you’ll need to start the business as well as any possible cash shortfalls in the initial period. m) executive summary Wrap it up! A punchy summary of why you’re doing what you’re doing will help get the message clear in your head as well as with anyone else who may read the plan (e.g. the bank manager!). Write this last, but put it at the front of your business plan.

This document need not be big and scary; in fact it’s of more use if it’s concise and meaningful to you. It’s also not necessary to cover everything suggested above in any great detail, but it is definitely something you need to set aside the time to consider properly. It may be worthwhile hiring an expert to help you at this stage to ensure your business idea is properly fleshed out before you take the plan from concept to reality.

Looking for a business plan

template?

There are plenty of free examples available online, but

there are also paid services online that come with a range

of support tools & training materials.

their own name or one they have registered with ASIC. This structure costs nothing to set up, you simply need to notify the ATO and get yourself an ABN (Australian Business Number). The advantages of this structure include:

üSimplicity

üMinimal compliance means less compliance costs

üSole control over business decisions

üLow set up costs

The disadvantages of this structure include:

ûNo asset protection – you’ll be personally liable for any debts of the business

ûLimited tax planning options

ûCan be difficult to claim a deduction for superannuation contributions

This type of structure is suitable for someone with little or no assets and is starting out in business with little turnover. The income tax is either paid at the end of the year after lodgement of tax returns or paid through an Instalment Activity Statement

(IAS) during the year and an adjustment at the end. Tax is paid on net profit, not what you draw out of the business.

partnership A partnership is a simple and effective tax structure to operate a business with one or more other people. From a legal perspective, a partnership is not a separate entity; rather it is an arrangement between two or more people carrying on a business with a view to profit. It is generally a good idea to get a legal document drawn up (known as a partnership agreement) that outlines the relationship you will have with your business partner/s in case of any legal dramas further down the track.

The advantages of setting up a partnership include:

üFree to register with the ATO

üAllows income splitting between the partners with potential tax savings

Once you’ve got your business plan sorted out it’s important to get the right legal structure in place There are a few different options here and the choice will depend on your own situation. The following is a guide only, and it is really important to get proper legal and accounting advice when setting up a new structure to ensure everything is in order. Below is a list of the most common legal structures used by small business (there are others, including trusts, but we’ve only included the most relevant ones here). Regardless of the structure you choose there will be various registrations that you’ll need to sort out. These may include trading names with ASIC, as well as ABN, GST, TFN, PAYG withholding, etc. with the ATO. Be sure to sort these out at the same time as you set up the structure.

sole trader This is the simplest legal structure you can adopt. A sole trader is an individual who operates a business as themselves. They can trade under

03 the structure

üSimplicity – income and expenses are pooled then the profits are sent to the individual partners to include in their personal tax returns so they can pay their own income tax

üCompliance costs are typically lower than for a company structure

üSome flexibility in how the profits are split The disadvantages of this structure include:

ûPartners are jointly and severally liable for the actions of the other partners

ûLimited asset protection (if any)

ûNo way of sheltering income – all profits must be distributed to the partners

ûIf a partner joins or leaves it can cause headaches on a tax level

The partnership is a good structure if you’re getting into business with other people and are just starting out, though there are definite weaknesses that need to be understood as compared to operating via a company structure.

company A company is a legal entity distinct from those who may own or run it. A company has both directors and shareholders.− Shareholders own the company− Directors manage the company on behalf of shareholders.

A shareholder’s liability is generally limited to any amounts they haven’t yet paid for their shares. As for directors, unless there’s an instance of misconduct, a director’s liability will generally be limited to any unpaid employee entitlements (i.e. superannuation and PAYG withholding).

The advantages of the company structure are:

üLimited liability for directors and shareholders

üA corporate tax rate lower than the top individual marginal rate (30% v 49%)

üFlexibility in distribution of income

üTax paid by the company can typically be used by shareholders when dividends are paid

üSuperannuation contributions are deductible up to age base limits

how to start a small business 09

Some of the disadvantages are:

ûCost of establishing and maintaining is higher than that of a sole trader or partnership

ûDirector’s potential liability in case of negligence or insolvent trading

ûSuperannuation and workers compensation required for wages taken

ûLosses cannot be distributed to shareholders

ûMore compliance issues — accounting standards, ATO, and ASIC This is a popular structure and a natural progression for people running a business where there are third party contractual arrangements such as taking on employees. The structure provides asset protection and allows for effective tax planning, but has considerable and sometimes complex compliance issues to consider.

banking Set up two new accounts on day one. One should be your everyday transaction account. Ask for a Visa debit (or similar) attached to it. The other account should be a high-interest savings account which is useful for parking deposits and amounts allocated for tax.

The key thing here is that the accounts should be in the business name and used for the business only. No personal matters should be run through these. This will save you time and money when it comes to the bookkeeping and tax work. wages

You need to get paid! Understanding how your structure works in relation to you getting paid is really important. Sole traders take the profit from their activities and pay tax when they lodge their personal returns. Partnerships work in a similar fashion after allowing for the split between partners, but companies operate very differently.

If you operate your business through a company you’ll need to set up a formal wage (accounting for PAYG withholding, superannuation, workers compensation, etc.) otherwise you’ll likely get yourself into trouble. Speak with your accountant to help set this up.

processes and procedures You need to ensure that the way you run your business is effective, efficient, and consistent. Having clearly articulated processes for all the key functions in your business cuts down the time taken to get the jobs done, and maximises your profits

Take some time to devise and document the following processes and procedures:− Sales− Product development − Marketing− Accounting / record-keeping− Recruitment− Invoicing and debt collection− Employee matters− OH&S

Love it or hate it, you’re going to have to do some administration work if you want this business to succeed. There are a few things that are important to get in place upfront.

04 the back office

Collate these into a procedures manual and add to it and edit it as your business grow.

Documenting these functions in a clear and accessible format can help your business run efficiently, and there are many online tools you can utilise (we used SharePoint to create our own internal Wiki page to capture all this stuff and make it accessible to the team). bookkeeping As an accountant, I can vouch for the importance of good bookkeeping. From day one it is imperative that you accurately record all of your income and expenses so that you can meet your compliance (e.g. tax) obligations accurately and on time.

More than this though, proper record keeping is the only way in which you can effectively track how your business is going – are you achieving your goals? Are you making a profit? Are you overpaying your suppliers? Without a solid system you won’t be able to answer these basic questions.

If you can’t afford a bookkeeper straight away, look into a cloud based bookkeeping software that has live bank feeds (i.e. it automatically imports the bank account data). These are typically quite easy to use and are well supported online with free training videos and manuals. Try not to scrimp here as the system you choose can really help you grow your business by giving you the information you need when you need it.

There is also a world of handy plug-ins for cloud based bookkeeping options that can assist with everything from performance reporting to inventory to debtor chasing to workflow and job management. Online accounting software is now very powerful, easy to use, and affordable so there is no excuse not to give it a go.

Risk management is a key pillar of any successful business and the two key areas you want to look into are insurances and legal advice.

how to start a small business 11

risk management For your insurance cover it’s always best to speak with an insurance broker familiar with your industry. They will be able to advise on the myriad types of cover available to you. Some key areas of cover include property, workers compensation, directors and officers, public liability, cyber, professional indemnity, and motor vehicle. Becoming engaged in any kind of legal conflict can be devastating for a small business. When starting out you should align yourself with a reputable lawyer who has experience in your industry. Ask around for a referral from friends, family, and colleagues to ensure you get someone you trust and get along with. Your lawyer will be able to advise on any potential risky areas within your business and ways to safeguard against possible action. They are also a valuable resource to run ideas past as the business grows to help ensure you’ve got all your bases covered. Always better to be safe than sorry.

Phone +61 (2) 9383 4580Fax +61 (2) 9383 4592

Email hello@generate.com.au Fox Studios Australia, Building 19,

38 Driver Avenue, Moore Park NSW 2021

eBook written by Ben Fletcher.