STARTING out in small business for the first time can be a daunting step for many.
Adding to that concern is the statistic that more than 50 per cent of small businesses fail in their first five years of operation.
However, statistics also show that small businesses make up 96.5 per cent of all private sector businesses in Western Australia.
There are several choices for going into small business – to buy an established business, enter into a franchise or start a business from scratch.
Franchises have proved popular with many because they are usually based on successful, easy-to-follow formulas.
Buying an established business can have benefits because, if it has been successful, the hard work of establishing the business has already been done.
Starting a business from scratch is usually the more difficult option but can, ultimately, prove more rewarding.
Most experts say the first step is to get good advice, be that from an accountant, business adviser or even a mentor.
Prospective small business owners need to analyse their strengths and weaknesses and how those can best be used to build their business.
They need to evaluate their idea. Has it ever been done before? Was it successful? Is their enough capital to make it work?
Small Business Development Corporation managing director George Etrelezis said the first step was to have an idea.
“Our experience is that most of the people who come to us for help starting up a business already have an idea,” he said.
“Once they have the idea they need to make sure it will bring in enough income to meet their needs.”
Mr Etrelezis said people had to choose a business that suited them.
“It’s no point going into a customer service type business if you prefer to be a back office sort of person,” he said. “Once the personal side of choosing a business is done the prospective business owner needs to plan.
“You need to cover the market, the competition and the demographics of the marketplace.”
Mr Etrelezis said the SBDC had prepared a checklist to help people start a small business.
One part of setting up a business often overlooked is applying for and obtaining the right licences and permits.
For example, in some cases home-based businesses need council permission to operate.
The business structure needs to be considered, too. Most small businesses operate as a sole trader, partnership, proprietary company or a trust.
Deloitte Touche Tohmatsu partner Dudley Elliott said different business structures had different tax implications and asset protection implications.
“Capital gains tax implications can have a huge bearing on how you structure your business if you aim to build it up to sell on later,” he said.
“From an asset protection point of view trusts can prove to be very helpful.”
Mr Elliott said some people were turning to binding financial agreements – a product of family law – to protect their assets in case of a business collapse.
These agreements can override the claims of unsecured creditors.
Another important detail is registration, with the business’s name needing to be registered with the Department of Consumer and Employment Protection.
The Australian Securities and Investments Commission has a national names index and that needs to be checked to make sure the name is not already taken.
Other places to check for clashes include www.ipaustralia.gov.au to ensure the name is not too close to a registered trademark.
Tax also needs to be taken into consideration. The Australian Tax Office has two publications – Tax basics for business and Record keeping for small business – that could be helpful. These can be downloaded from www.ato.gov.au or be obtained by phoning 13 28 66.
The location of the prospective business is crucial, as is the lease attached to it.
Mr Etrelezis said location was vital, even if the business was a service-oriented one.
“If you’re located two hours away from your prime market it will be costly,” he said.
It always pays to have a business adviser or solicitor look over the lease documents because being in the wrong location or having a lease that does not suit the business could lead to failure.
Securing finance for the business can be one of the most challenging aspects of the process.
Business owners need to assess the start-up costs and estimated income and operating costs for at least the first 12 months, and work out how any shortfall will be funded.
Most financiers will require a business plan, including cash flow forecasts, and sufficient collateral to secure a loan.
BankWest Business Express director Gary Johnson said customers needed to be able to produce timely cash flow forecasts to support borrowing requests.
“You need to demonstrate a good understanding of the key drivers of your business and demonstrate an understanding of the cash flow cycle of your business,” he said.
“You also need to be realistic. I’ve lost count of the number of ‘hockey stick forecasts’ I’ve seen.”
Mr Johnson said six key things to keep the bank happy were:
prepare a professional business plan;
keep your manager informed;
live up to your promises;
let the bank know if trading conditions deteriorate;
have a fall-back plan if things go wrong; and
update your business plan.
Keeping a tight rein on finances will help keep the business going, and this includes things such as costing and pricing accurately, knowing the break-even point, preparing sales projections and cash flow forecasts.
Finally, the marketing of the business needs to be taken into account.
This involves researching the market to find out who the customers will be, how much they are prepared to pay, how much they can be expected to buy and what the size of the market will be.
Marketing Centre CEO Mike Smith said to be successful a business needed to make an offer that “a significant number of people will want to choose you for”.
“You need to understand what the competition is offering and be able to answer the question of why people should choose you,” he said.
Using information generated from the marketing plan, a business can develop a plan to reach those customers with a product they want at a price that they are prepared to pay and how best to reach them.
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