Psychology 101 for SME owners

IT’S not a Masters of Business Administration (MBA), but rather a degree in psychology that could prove most useful to business owners in avoiding the pitfalls of growing their small or medium-sized enterprise. In investigating why success eludes so many SMEs, it is apparent that the personality traits of business owners have much to do with it. As nearly all SME owners need to fund the further growth of their business at some stage, be it to cover additional staff, new equipment, product development or marketing campaigns, the Institute of Chartered Accountants has come up with the following pseudo-psychological analysis revealing some of the bad traits of business owners in expanding their businesses. The blind optimist This retailer deals in large-sized stock items with small profit margins from small premises. The most basic of business plans would have spelt out the impossibility of holding and selling sufficient stock to cover this business’ overheads. And would have done so before the owner had committed to a five-year lease. The ‘I don’t pay tax’ obsessive So intent on minimising tax, this business owner ends up weakening the balance sheet to the point where no financier would fund further growth, eventually leaving the obsessive with no business to pay tax on. The egomaniac As the egomaniac has no faults or limitations, none will be taken into account in his/her running of the business. However, with skills that are technical rather than managerial, this person should not be in the role of managing director. Yet, you try to tell the egomaniac he/she needs someone else to manage the growing of their own business. The skinflint The skinflint’s business is flying blind because he/she refuses to pay for regular financial statements. This type of business owner doesn’t realise he/she is losing profit margin until the annual accounts are finally prepared six months after the end of the financial year. The smart Alec The smart Alec is young, brash and had a good idea. The business has taken off and grown fast, but systems and procedures are far too boring and banal for this young entrepreneur. By the time the smart Alec realises the mess the business is in, funding growth is no longer the problem. The empire builder The empire builder is addicted to the buzz of making acquisitions and lives by the motto ‘bigger is better’. Taking the eye off profit margins, costs and cash flow to focus on acquiring debt, this entrepreneur’s business is in no shape to deal with an interest rate rise. The inevitable fall of this empire will take a lot of innocent small suppliers with it. In response are a number of tips for SME owners looking to expand their businesses. • Look at all the funding options available and choose what best suits your business and your long-term goals. • Bank loans are a good option if the business has a good trading history. • Consider debtor finance as an option. This finance assists businesses in managing cash flow by reducing the time the business has to wait from the time of purchasing the stock, or providing the service, until the receipt of cash. • For a fast-growing business, equity finance is something to consider. An equity investor will usually be willing to acquire equity in the business (eg shares) and commit to the investment for a number of years without expecting short-term returns. However, they will require a relatively high return on exit. • If going down the equity capital road, make sure you choose a source that you will be comfortable with. Understand what the investors will require from you and what form of exit they will want. Your aims must be compatible. • If you are looking for someone to provide both skills and cash to the business consider ‘business angels’. They are private financiers who provide early stage growth capital. There are a number of business angel organisations including one operated by Aust-ralian Business Limited (ABL). See • If you are thinking about an initial public offer, get a reality check. Start planning years ahead and make sure you clearly understand the requirements and the disadvantages as well as the benefits. • Prepare your business plan and financial projections. Have them reviewed by an external party (eg your accountant) before you hand them to prospective financiers. • Also consider what government funding is available. There are a number of targeted government assistance programs such as the Comet program for product innovation and commercialisation, and export assistance programs. • Make sure you assess the tax implications of loans. Seek advice from a chartered accountant or a registered tax agent. • Learn from others. Talk to people whose businesses have had a similar growth pattern and find out what did and didn’t work for them. The Institute of Chartered Accountants in Australia represents 700,000 members worldwide, who are fully qualified Chartered Accountants working in diverse roles within private practice, business, industry, government and education, both in Australia and overseas.

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