First Chapters

The complete reference handbook for small to medium enterprises

Extract

INTRODUCTION

The Penguin Small Business Guide is a complete reference manual for small and medium enterprises. It provides practical and up-to-date advice on a broad range of issues affecting Australian businesses, including legal, financial, tax, marketing, workplace relations, strategy, accounting and business planning.

It will be useful if you are considering starting your own business, buying a business or franchise, growing an existing business or launching your products into overseas markets. The book aims to help your business at any stage of its life cycle, whether you are a small startup operation run from a garage or a multimillion-dollar operation with hundreds of staff and offices around the world.

Inspirational case studies of successful Australian and international businesspeople like Richard Branson, Dick Smith and Gerry Harvey are scattered throughout. The book is intended to be a 'one stop shop' and contains checklists, practical examples, useful phone numbers and web sites. Many chapters contain tips on how and where to get (free) advice or financial assistance (including government schemes and industry awards/grants).

It provides step-by-step instructions on the following topics, among others:

• effective business planning and strategy
• structuring your business from a risk and tax perspective
• maximising your chances of raising debt and equity finance (including from business angels and venture capitalists)
• understanding your legal obligations
• recent changes to the tax system and GST
• launching successful marketing strategies
• complying with your regulatory and licensing obligations
• making the most of e-commerce and the Internet
• understanding your financial statements and forecasts
• strategies for finding, hiring and retaining staff.

It is important to learn as much as possible about business and know when to get professionals, such as lawyers and accountants, involved. This guide covers a broad range of issues relating to establishing and growing a business. Not all topics considered will be relevant to your business, as much depends on the size of the business and your specific industry. Some issues will only become relevant to your business as it grows through its life cycle.

Challenges facing small and medium businesses

Running a small business presents unique and complex challenges for entrepreneurs. You will be required to master a broad range of technical skills such as strategic planning, financial accounting, sales and marketing techniques, negotiation skills and corporate law - skill sets which in larger companies would be spread amongst a number of specialist managers.

The competitive environment is unstable, unpredictable and hostile. New well-funded entrants may launch at any time. Similarly, new products and substitutes may appear, making your business obsolete. You must be agile enough to change your strategic direction and reinvent your business to respond to these factors. Existing players will not take kindly to a new entrant and will use whatever means necessary to remove you as a threat.

You will need extraordinary management, leadership and organisational skills if you are to build a robust business. You will need a quasi-evangelical personality to convince key stakeholders to back your high-risk idea - not only is demand for your product or business untested, it requires significant capital expenditure to build and is likely to run at a loss for quite a long time. You must compete for scarce resources - staff, capital and services - against other established businesses who can show their stakeholders a track record and proven business model.

This book attempts to examine the peculiar challenges facing small or medium enterprises, and to provide you with some of the skills to manage those challenges.

SOME RECENT TRENDS

The last few years have seen some fundamental changes in the Australian business environment. In order to successfully operate a business in such a dynamic climate you need to understand the key trends affecting business in Australia.

e-commerce

The forecast growth of the Internet, both in Australia and globally, represents a major opportunity for existing businesses to expand and capture market share by becoming e-commerce enabled. It also represents a continued opportunity for new businesses to be formed to utilise the technology in previously unthought of ways. Yahoo, Google, eBay and Amazon are now household names with billion-dollar market capitalisations, yet the businesses were unheard of five or so years ago.

Global financial crisis

The global financial crisis (GFC) of 2007-2009 was triggered by the bursting of the United States housing bubble and the associated increase in delinquencies on sub-prime mortgages. The GFC has been noted by leading economists as the most serious economic crisis since the Great Depression. The effects of the GFC include a significant decline in economic activity among the world's largest economies (including the United States, England and Australia). In turn this has resulted in a material decline in the wealth of consumers (estimated in the trillions of dollars) and the widespread failure of businesses. The governments of leading economies have incurred substantial financial commitments to promote stability, particularly in the finance sector.

Whether you think the economy is showing new signs of life or we haven't seen the worst of it, there is no doubting that the rules have changed. The days of easily available debt for business and consumers alike are gone. Investors have seen their investments in listed shares plummet and the worth of their superannuation savings tumble. We are entering an era of frugality and conservatism.

Consumers will be adopting a far more conservative lifestyle than previously. This new thriftiness will have important impacts on spending habits for many things like white goods, tourism and housing. Similarly, businesses will also be cutting back on the nice-to-haves: for example, non-essential travel will be cut, advertising in newspapers or on television will be cancelled, and subscriptions to magazines, newspapers and journals will be postponed.

The business strategies that worked before GFC may no longer be appropriate. You will need to rethink many aspects of your business and ensure you adopt strategies to minimise the downside and also to take advantage of new opportunities which are arising. Instability will create new markets and you should be thinking laterally about your sector, your competitors and your positioning in the market. 

For tips on managing your business through hard times see Chapter 23, which covers contingency planning, cost management and strategies for managing your staff.

Taxation regime

In recent times the Australian tax regime has gone through some fundamental restructuring including the introduction of the GST, introduction of share-to-share rollover relief, tax consolidation for corporate groups, and a 50 per cent exemption from capital gains tax for assets held longer than twelve months. Before adopting your corporate structure you must obtain advice from an experienced tax adviser. An inappropriate structure can result in adverse tax consequences at a time when your business cannot afford it. On the other hand, avoid adopting an overly complex or unusual tax structure as it may turn future investors off your company or jeopardise your long-term commercial objectives or exit strategies.

Globalisation

The geographical boundaries for business have blurred. Your competitors now include well-funded and aggressive foreign corporations looking to expand into new markets. The flip side of this of course is that your business has the opportunity to be 'born global' and service not only the Australian market but also the global market. You need to consider globalisation when setting up your business in order to understand the dynamics of doing business overseas.

Other trends

There are a number of other important trends which continue to shape business in Australia:

• Product life cycles have become shorter due to inbuilt obsolescence or rapid development programs.
• There is a high level of regulatory complexity facing small businesses in Australia (which has worsened with the introduction of the business activity statement).
• The government has committed a high level of support for small businesses, and will promote innovation through a mix of tax concessions, government grants and free information/consulting services.
• Businesses are focusing on their core activities, with any non-core activities (such as human resources or IT services) being outsourced to third-party providers.

CRITICAL SUCCESS FACTORS

Critical success factors of small to medium businesses are:

• deciding the market entry strategy - the mixture of subsidiary sales offices and distributors
• managing the 'extent issue'- deciding what won't be done
• maintaining alliances with large nationals and multinationals, which can be the key to world markets, especially knowledge of overseas markets
• deciding the business model and plan, including exit strategies for investors
• establishing competitive pricing and margin models
• investing in market research
• finding customers who are risk takers, i.e. early adopters with technical expertise.

There are a number of other factors that are critical to the success of any business, including understanding your legal obligations, cultivating your best asset (your staff ), understanding your market, gaining access to funds and understanding your competitors. All of these topics are dealt with in more detail throughout The Penguin Small Business Guide.