Starting a business.

Hi, thanks for watching our video on ‘Starting a business’.

There are many reasons people want to start a business: to make money, to be your own boss, or perhaps to build a legacy for the family. Building solid foundations for the business to operate and be sustainable is absolutely essential. It can be lot of hard work and you’ll have ups and downs along the way, but with careful research and planning, you, like so many others, can make your dream of being a business owner come to life.

Before we begin, I need to let you know that the information contained in this presentation is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.

In this video we’re going to take a high-level look at the process of starting a business and some of the many considerations that you need to make along the way. Every business starts with a vision. A vision of what you are aiming to achieve in the business and why. Once this is clear, you need to develop a plan for how the business will operate so that you can achieve what you set out to achieve.

The rubber then starts to hit the road in the creation part of the process. This could be considered the boring bit. All the paperwork, dotting the “i’s” and crossing the “t’s”. However, this step is absolutely essential to successfully launching your business.

Every business owner in the world started just like you with an idea or passion that they believed could make them money. Your idea or passion is your vision, and your business is one way of bringing that vision to life. But do you have what it takes to bring it to life?

Research indicates that there are a number of character traits that are common to successful entrepreneurs. They include: Courage, Drive, Independence, Confidence, Passion, Leadership, Ideas/innovation, and Resilience.

It’s one thing to have a great idea but quite another to “go it alone” to bring that idea to life. Because, when you are starting your own business, you are definitely “going it alone”. You alone are responsible for the success of your business, so you need to ask yourself some tough questions around whether you have what it takes.

Questions such as: − How much time and money am I prepared to risk on this business? − Do I have the resources, financial, physical and mental, to see this through? − How will I stay motivated when things aren’t going well? It can be a lonely place at the top but if you are the right person for the job then it can be a very fruitful and fulfilling place to be as well.

Ok, so if you are confident that you are the right type of person to run your own business, the next questions you need to ask are “What?” and “Why?” “What is it that I actually want to get out of running my own business? And why?”

For most people part of the answer to this question will be, and needs to be, “to make money”. But even this simple outcome has a number of different scenarios … do I want to make lots of money? Do I want to just make enough to take care of the family and be able to spend quality time with them? Do I want to create a legacy for my family to carry into their future?

For many people the “what” and “why” is simply a chance to work at something they enjoy doing; and for some it is the opportunity to use their skills and knowledge to improve the lives of others. It’s important to be very clear in your own mind what you want to achieve and why, as this will help to focus your planning.

Now, while there are many successful businesses out there that don’t have a comprehensive business plan, to my way of thinking, having a business plan is absolutely essential. However, I believe the greatest value of a business plan actually lies in the planning itself rather than the end product.

By developing a business plan, you give yourself the opportunity to explore different scenarios, decide on a path that you think will get you to your destination, and what actions you’ll need to take to get you there. It’s a bit like a roadmap or GPS for your business – focused on your destination and providing guidance for how to get there.

To help with that plan we use a framework called the 7Ps. The first P, and we have already looked at this to some extent, is Purpose. In asking the ‘what’ and ‘why’ questions we looked at earlier, we were thinking about the purpose of the business. By identifying this purpose, we can then centre our business on this, and all our other decisions and actions should be aligned to achieving this purpose.

Some of the tactics we can then use to achieve that purpose are … our product, people, place, price, and promotion. So, firstly your Product or Service. An effective business plan will include things like: • Exactly what is it that you are selling? • What do you need to put it together? • How does it go together? and • What benefit does your customer get out of using the product or service?

By clearly defining what your product is and the customer problem that it solves, you can remain focussed on delivering a product that is valued by your customers, and that they want to buy from you.

Then, your People …those who are going to help you achieve your purpose. When you’re planning, it helps firstly to think about all the jobs that need to be done and what time and skills are required to do them. This then translates into the people that you will need.

Next is your Place … • Where will you operate from… home, online, a shop front? • In what location? • How much area do you need? • What facilities does it need? And so on …

The next tactic is Price … • How will you set the price of your products or services? • What’s the value proposition to the customer, and how much are they prepared to pay for it? • Will this make you sufficient profit to be successful?

Then our 6th P is … Promotion … this is about how you will communicate with your customers and potential customers … • How do the right customers know that you have the solution to their problem? • How are they persuaded to buy from you? • What would encourage them to come back and buy again, or recommend you to others?

The final P is Performance. How do you measure whether you are successful or not? And achieving your Purpose. Having an effective system in place to measure how well your product, people, place, price, and promotion have helped you to achieve your Purpose, is essential. Addressing the 7Ps in a business plan helps to build a strong foundation for your business. For further insight into business planning, watch our videos on Business Planning and Optimising Business Planning.

Now it’s time to start creating the business and bringing the business idea to life. This part of the process may not seem as exciting; there are many Is to dot and Ts to cross however you’ll be thankful in the end if you’ve been thorough at this stage. When creating your new business, you’ll need to select the right legal structure that will help to keep your tax to a minimum and protect your assets. We are going to look briefly at the common structures and the various pros and cons of each.

You’ll also need to ensure you are aware of the statutory obligations of being in business, so we’ll look into some of those. As well, you’ll need to consider how you will fund the creation, launch and ongoing operation of the business. And finally, you’ll need to think about risk management. What are the things that could go wrong? And what needs to be put in place to reduce the impact on the business?

So, let’s start with the business structures.

There are typically 4 main types of structures. It is important to understand the advantages and disadvantages of each structure and, where necessary, seek professional advice to set up the business in a structure that is right for you as the owner, as well as for the business.

Remember too, that changes to the business structure in the future could be costly. For instance, if you intend to grow significantly over time and employ people, it makes sense that your structure will need to be different than if you intend to only ever operate on your own.

Speaking of which, our first structure here is ‘sole trader’. As a sole trader you simply operate as you. You are one person, you are personally liable, you are taxed at your personal marginal tax rate, and you have full control. One of the key drawbacks of this structure though is that you only have your resources … intellectual, financial, and so on … which may be restrictive to growth. You are also personally liable for any debts of the business.

Our next structure is a Partnership. A partnership can be up to 50 people; the profit distributions are governed by partnership agreement; and distributions are taxed at the partners’ personal marginal tax rates. With this type of structure, you have access to the collective knowledge and funding of all the partners … the challenge potentially being to get everyone to agree.

However, remember that there is limited protection for personal assets with this type of structure as each partner is jointly and severally liable for all partnership debts.

Another structure to consider is a Company. The advantage of establishing as a company is that there is limited liability for company owners. The company is its own legal entity and as such can trade and borrow as itself and is liable for its own debts. Company profits are currently taxed at a flat company rate. A company is more expensive to establish and administer however it can offer protection for personal assets and be easier to manage a change of ownership in the future.

A Trust is the most complex of all the business structures however it offers most protection for owners and most flexibility in distribution of profits. A trust is established via legal document known as a trust deed. The trust deed appoints a trustee who manages the finances of the trust on behalf of the beneficiaries of the trust. What the trust and the trustee can and can’t do are set out in the trust deed, as are who the beneficiaries are, and what their entitlements are.

A trust is a financial entity as opposed to a legal entity. Assets and liabilities are held on behalf of the beneficiaries of the trust, not actually owned by the trust. Profits are allocated to the beneficiaries and then taxed as the beneficiaries’ income at their marginal tax rate. While this structure is more complex and costly to administer, it offers limited liability for beneficiaries, and more flexibility for distribution of income between beneficiaries.

It is often used by family businesses that may span a few generations, or where owners have substantial assets or other interests outside of this particular business.

Talking to your lawyer, your accountant, and your personal financial advisor will be helpful when selecting the legal structure for your business … and remember to take into account what you want to happen with the business in future, not just what works right now.

The next part of creating the business is to understand your statutory and legal obligations. Noncompliance with any of these may lead to substantial fines, audits and remedial work that could jeopardise your business, so it very important to get this part right. There are 4 main areas to look at.

Let’s start with registrations and licences. The first one under this heading is your Australian Business Number, or ABN, which is a unique number that identifies your business. You’ll also need a Tax File Number, or TFN, which identifies your business to the Tax Office. Sole traders will use their own personal TFN, but partnerships, companies, and trusts need their own tax file number.

If you are going to be structured as a company then you’ll need to register with the Australian Securities and Investment Commission, or ASIC, who will issue you with an Australian Company Number, or ACN. Relationship Authorisation Manager or RAM is a secure logon that identifies the business when it uses a government online service such as the ATO Business Portal.

There are also various federal, state and local council regulations requiring different licencing, permits or registrations for various industries. The Australian Business Licence and Information Service (or ABLIS) helps find this information.

And, unless you are going to operate just under your own name, then you need to register your business or trading name. A sole trader can simply use their own name such as Mick Brown but as soon as you add anything to it, such as Mick Brown’s Garage, then that name needs to be registered. A company can also use its own name but again if you wish to use anything other than the registered company name it also needs to be registered as a business name.

The second area we’ll address here is Taxes. Starting with GST, or Goods and Services Tax. If your business provides goods or services on which GST is applicable, then you must register to collect GST if your annual sales exceed $75,000 or if you are a taxi operator. The GST of 10% needs to be included in your price and recorded on your invoice/receipt.

The GST you collect, and the GST you pay, are reported to the ATO in your Business Activity Statement (BAS). Depending on the size of your business, your BAS can be completed monthly, quarterly, or annually. It’s a good idea to discuss with your accountant which is the most suitable for your business and your cash flow.

Another tax you’ll need to manage is PAYG or Pay As You Go withholding tax. You’ll need to register for PAYG if you are withholding monies from payments to others, such as a business that does not have an ABN, or the taxes you withhold from employee wages. Again, this tax being withheld from payment needs to be collected and submitted to the tax office. You may also be paying PAYG instalments yourself, based on your anticipated income, which are then netted against your end of year tax return.

FBT or Fringe Benefits Tax is applicable when providing benefits to yourself or your employees such as private use of a business motor vehicle, club memberships, holiday expenses and so on. This is a complex tax and best discussed with your accountant. If you are employing people then you will need to use the tax offices Single Touch Payroll system or STP to report wages, tax and superannuation.

These are just a few of the taxes you will need to manage. For more information refer to the ATO website and your accountant.

Another area you need to stay abreast of is Superannuation. As an employer, you are required to make contributions to your employees’ superannuation fund – known as the Superannuation Guarantee. The Superannuation Guarantee is payable to employees over 18 years of age, or under 18 and working more than 30 hours a week.

The Superannuation Guarantee is currently 10.5% of Ordinary Time Earnings, with gazetted increases over the next few years. There are very tough penalties if this obligation is not adhered to and lots of legislation involved. Make sure you talk to your accountant and get this right. Again, there is more information available on the ATO website.

The last area we’ll look at here is to understand your obligations as an employer and what your employees are entitled to. There are rules around what employees are entitled to at work including, but not limited to, hours of work, rates of pay, leave entitlements and so on. The National Employment Standards sets out the 10 minimum entitlements that must be provided to all employees. Information on these standards is available on the Fairwork website, fairwork.gov.au.

In remunerating or paying your employees ensure you are familiar with the modern award which sets the minimum employment wages and conditions for an industry or occupation. Award details and other information can also be found on the Fairwork website.

Getting your statutory and legal obligations right is an important step in setting up your business. There is plenty of information available online but having a good accountant and lawyer will be invaluable as you go through this process.

The next thing we are going to take a look at is how you might fund your business. There are 2 types of costs that you’ll need to account for - your initial set up costs, then your ongoing capital expenditure and operating expenses. Let’s start with the start-up costs.

Getting your business up and running will incur a lot of different costs from licencing and registrations, the professional fees of an accountant or solicitor that will help with the set-up, marketing and communication such as business cards/ flyers/ a website, there’ll be staffing costs, insurances… the list goes on. And of course, office establishment costs such as a bond on a rented office, furniture and technology for the office/shop.

It’s important to understand which of these costs you might incur, how much they are likely to be, and how you are going to pay them. Do you have sufficient cash set aside? Will you need a financial partner or investor to get started? Will you need to borrow for some of the bigger ticket items such as premises, or machinery?

The money you spend on items such as premises, equipment, technology and so on is known as capital expenditure or capex. In general, the money to purchase fixed assets such as equipment, plant and machinery, premises, vehicles and so on, comes from 2 sources – the business owners or investors in the form of Equity or from external sources such as credit from your suppliers or loans from the bank. These are known as Creditors.

Getting the right balance between these two sources of funds is important to long term success. Too much borrowed money can be expensive and risky for the business, but as an investor in the business, equity-providers should be concerned about the effective use of their investment and the return they will get from that investment.

The other type of funding we need to plan for is the everyday operating expenses – known as opex. This includes buying stock, paying wages, rent, maintenance, marketing etc etc etc Part of this funding is also referred to as working capital. The key to managing opex or working capital is to have an understanding of the amounts involved and the timing of collecting and spending of your money.

Starting with spending … what do you spend your money on and what are your spending patterns? Do you import stock from overseas that you need to pay for well in advance of selling? Or is there a value-add process that delays getting your stock ready for sale or invoicing your services, while in the meantime you need to pay wages, rent and overheads. Knowing these spending patterns is crucial to understanding the amount of opex or working capital that you’ll need and for managing your cash flow.

You then need to make sales … and again, understanding the timing and amounts will help you manage your cash efficiently. For example, does your product have a long lead time to a sale? Or is the purchase decision and sales process relatively short? How effective are your salespeople in getting your product into the hands of your customers?

Once you have made the sale, you’ll need to collect the money. Are you a cash business that collects at the time of the transaction? Or are you in an industry where you might need to issue an invoice for payment at a later date? If so, how long can you wait for your payments and how much credit are you able to extend? How are you going to collect? Fortunately, new technologies like online payments and mobile EFTPOS machines, are making it easier to get paid more quickly.

Then finally the cash comes back into your bank account ready to start the whole process again. Many new business owners underestimate the amount needed and run into cash flow problems. Be thorough and have a good understanding of how much cash you need, and how it flows through your business, to avoid any cash flow issues.

The final part of the creation stage is to implement risk management strategies. As a new business owner, it pays to be aware of the different types of risks that could affect the business and what actions need to be taken to reduce the likelihood and impact of these risks. It’s better to address this from the outset before things have a chance of going wrong.

It’s much easier to play the “what if” game now and put contingency plans into place rather than trying to think clearly during a time of crisis. Trust me the time to recovery will be easier and shorter.

A key risk to consider is Product risk. • What happens if your product is not right for your customer? • Or if perhaps the quality is not up to expectation? • Can you sustain consistent supply? • Or even, what if your product should cause personal injury or financial loss?

Another risk to have plans in place for is Asset risk. • What if the equipment needed to serve your customers isn’t available? For example, if it breaks down or is damaged? • How will you replace or repair the assets? And how will you serve your customers in the meantime?

Supplier risk is about ensuring you can continue to meet your customers’ expectations even if your supplier isn’t able to meet yours. • How many suppliers do you have? Are you reliant on one in particular? • What happens if your main supplier goes out of business? • Or if supplies are unavailable due to a disaster of some nature? • Are there other suppliers? Or alternatives that you can access?

Also consider your People risk. This refers to something happening to one of your people that may have a detrimental impact on the business. • What happens if you get sick or a key staff member is ill or leaves? Or even if one of your staff is injured on the job? • What happens if you hire the wrong person? If they don’t have the right skills or don’t show the desired attitude and behaviours? It’s expensive to recruit so you want to get this right as often as possible.

• And, how do you ensure that they do their job safely, accurately, and take good care of your customers?

Financial risk is another to consider. This includes things like interest rates, foreign exchange rates, trade agreements or even just the general economy. And of course, cash flow.

And finally, there’s Customer risk. It’s just not possible to please all of the people all of the time so … • How will you handle customer complaints? Or if things get really out of hand … what if a customer takes their complaint to social media or a current affairs program? • What if your biggest customer suddenly stops buying from you? This could be due to their own cash flow, a disaster of some nature, or even new competition.

Understanding the likely risks to your business beforehand, and the possible implications, allows you to plan for prevention or put in place contingency plans to minimise the impact when an event like this occurs.

If you have your vision, you’ve worked out how you will realise your vision in a business plan, you have created the infrastructure, addressed your legal obligations, and your financial considerations … I wish you every success in starting your business.

Thank you for watching our video ‘Starting a business’. I trust you found the information helpful and I encourage you to check out the other webinars and resources on the Davidson Institute website to help build your financial confidence. Bye for now.