INFLUENCES IN ESTABLISHING A SMALL TO MEDIUM ENTERPRISE

INFLUENCES IN ESTABLISHING A SMALL TO MEDIUM ENTERPRISE How entrepreneurial are you? Do you have what it takes?

Your task 3-4 mins To create a profile of a successful business person operating an SME: What does a successful business person look like? • What personal qualities? • What qualifications? • What skills? • What sort of motivation? • Do they need to be entrepreneurial? • Is there a better cultural background for establishing a business? • What gender should you be?

What experience There is no such thing as the right sort of experience to set up your own business...!

Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.3, pg. 342

What are the personal characteristics of a typical entrepreneur? Create a mind map

Why would you want to start your own business? What are the rewards of business ownership?

SOURCES OF ADVICE TO HELP YOU SET UP YOUR BUSINESS Research local, state and federal government agencies and non-governmental organisations that can provide information to assist entrepreneurs: What websites or places can you turn to or click on for support? You should have already done this for your business plan...

SOURCES OF ADVICE • http://www.abs.gov.au/ • http://www.ausindustry.gov.au/Pages/AusIndustry.aspx • http://www.nswbusinesschamber.com.au/Home.aspx • http://www.becaustralia.org.au/ • Networks • Trade associations • Federal, state and local government departments • Accountants • Solicitors • Bank Managers • TAFE colleges • Universities

WHAT ARE THE DIFFERENT WAYS TO ESTABLISH A BUSINESS?

Establishment options for a business 1: create a new business from scratch 2: Take over an existing business that already has a good reputation: good links with suppliers and a track record of trading. 3: Franchise: a business pays for the right to use an established businesses' trade name and business formula – the franchisor is hte seller of hte business concept

What are the advantages and disadvantages of each type of business FILL OUT WORKSHEETS • Starting from scratch • Buying an existing business • Franchising

Advantages and disadvantages of establishing a new business from scratch

Advantages and disadvantages of starting a new business advantages disadvantages • Owner is free to make every decision • Less expensive to establish than an existing business or franchise • Can choose an ideal location • Can select own name • No goodwill to pay for • No hidden problems from the previous owners • If funds are limited, possible to start on smaller scale • Harder to obtain debt finance without a past record or sales • Can take months or years to break even and earn a profit; slow to build a customer base • Need time and energy to recruit and train staff • No network of suppliers establishes; no goodwill with customers • Time delays in building, setting up the work place, gaining licenses/permits, business registration • No past records of business performance • No procedures in place • Existing and potential clients are unknown

Buying an existing business • Business can be purchased as a turnkey operation: all systems, procedures, policies and operations are in place and no changes are needed to improve the business • Total cost is known • Loyal customers already exist, generating income immediately • Advice and assistance may be sought from existing trained staff and former owners • Business has already passed through difficult establishment and possibly growth phase • Easier to obtain finance as has past records of performance and established cash flow • Restrictions in size, procedures and layout • Existing image and policies of the business may be difficult to change/hard to shake poor reputation • Inefficient systems and operations can be difficult to change • May be difficult to assess the value of goodwill • If the business premises are leased, the new owner may have difficulties with the existing landlord • Some employees may resent change of owners • Past success may be based on personality/talent of previous owner Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.2, pg. 360

Buying a franchise • Only about 12% of franchises fail • Expert backing and advice provided by franchisor/training • R&D carried out by franchisor • Suppliers and materials already established • Immediate benefit from franchisor’s goodwill • Well-planned advertising often exists • Volume buying is possible, often resulting in cheaper stock • Well established procedures, inventory control systems (JIT) and operating manuals • Selling a proven, well-established, profitable product • May cost more to establish franchise than start anew business • Franchisor controls the overall operations • Threat of franchise termination can be carried out in some circumstances • Profits must be shared with franchisor • Goals of franchisor may be incompatible with those of the franchisee • Poor service and products provided by one outlet ay adversely affect other outlets • The franchisee may feel like an employee, without the benefits and security • Products may become ‘out of date’ resulting in decreased sales and profits Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.3, pg. 361

QUESTION EVALUATE THE CHANGES IN THE BUSINESS ENVIRONMENT THAT HAVE AFFECTED THE SUCCESS RATE OF NEW BUSINESSES

Market analysis! Syllabus points: Market: goods and/or services, price, location Why is market analysis important?

What is market analysis? A market analysis involves collecting, summarising and analysing information about the market

WHY IS MARKET ANALYSIS IMPORTANT? • Businesses fail without a market (customers) for their goods or services, so they must always undertake a market analysis • Goods and/or services: • You must be very familiar with the good or service that you wish to sell • Research to determine the size of the market for your product and where the actual target groups are located e.g.? • Identify your target market – who are they and how will you advertise them. • Research area where you will sell your product to find out age, sex and occupation to see if there will be demand for your product there • Make sure product is not a ‘copy’ of an already existing business

PRICE • Need to establish an appropriate price for the product offered to the market • Price the business can charge will be determined by prices of similar competitors’ products • You need to know what it actually costs you to product the good or provide the service (COGS) • You will need to have a price high enough to make a profit (price cutting in order to compete would probably result in a loss and closure of your business)

PRICE: summary Price can be set by following a recommended retail price, using percentage mark-ups, price leadership or finding what the market will bear.

Location • One of the key decisions of a prospective small business owner is concerning the actual location of the business. • Cost to rent or buy the site is always a key consideration, but depending on the type of business that is being established, the owner may also want to consider visibility, the proximity of suppliers and support, and even whether or not the area chosen will lend the business an air of professionalism. • Different types of business will be suited to different locations Retail/service sectors: high visibility and high traffic levels. Wholesalers: want to close to transport such as main roads, railway to reduce costs and save time Manufacturing: need to reduce costs, be close to suppliers and markets (zoning requirements factories will be located on outskirts of cities) Demographic of market: luxury Clusters: food courts, shopping districts Support services: located close by

FINANCE Syllabus: source, cost EVERY business has start up costs that they must be concerned about. • How much will obtaining premises cost? • How about inventory? • What about staff, marketing and utilities? • Interest due on money used to start the business • Decision of whether to lease of buy has a large effect on these calculations (buying vs leasing) • Cost of goodwill – intangible asset • What other questions are there to consider?

Sources of finance • Starting a business does not require as much capital/finance as people may believe: many start with $5,000 of less • 21% of businesses in Australia operate from a home address • Initially business owner should continue to work part time to have a reliable source of income or have a partner working full time for bills etc • What are the two options of financing for the budding entrepreneur?

2 sources of finance:DEBT AND EQUITY EQUITY FINANCE: comes from internal sources, such as the owner’s savings and profits reinvested in the business, or external sources such as prom shareholders in a private company (private equity) DEBT FINANCE: or loans. Is provided by a number of financial institutions outside the business. Major banks are the biggest providers of finance for SMEs. They have many offerings for small business needs. Investment banks provide finance for large businesses. SMEs are not in their target market. They also provide investment advice, takeover and merger assistance. Government organisations have finance available as grants and low-interest loans to businesses that have export potential or will contribute significantly to the economy and employment http://www.grantslink.gov.au/

Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.4, pg. 374

Ethical issue Is it ethical for the owner of a small business to use his or her personal credit card to pay for business expenses and to purchase inputs in order to earn frequent flyer points and personal rewards?

LEGAL Syllabus: Legal – business name, zoning, health and other regulations Of the many laws and regulations that small business owners need to comply with, some important ones are: – business name registration – land zoning – health regulations.

BUSINESS NAME • it is a legal requirement for a business to register its business name. A business will generally have a trading name. When the trading name is different from the name of the owner it must be registered with NSW Fair Trading.Business Names Act 2002 (NSW) • Registering the business name allows any stakeholder to identify who the owners are. The business is issued with a certificate, which must be displayed where customers can easy see it. • Must also apply for an ABN – Australian Business Number which must be recorded in all transactions, letters and documents this is obtained via the ATO • Business owners can check whether the name they wish to use has been taken by consulting the National Names Index on ASIC’s website.

ZONING • Local governments have the legal power to restrict where certain businesses can be located. • Zoning regulations or laws create areas, where land can only be used for particular purposes. WHY? • The typical zones are: residential, commercial, light industrial and heavy industrial, open spaces and recreation • As communities grow areas can be rezoned

Health regulations • Local governments require businesses in their region to be registered and hold all relevant permits and licences. • Health regulations exist to protect consumers from diseases and food poisoning. • Every business in Australia is covered by occupational health and safety legislation. In NSW it is the OH and S act 2000 (NSW) • Many industries have specific requirements for health, such as those businesses involved in food preparation and service – they must: • Have a clean kitchen, free from vermin (rats and cockroaches) • Use clean cooking utensils • Prepare food in a hygienic manner • Cook and store foot at appropriate temperatures • NEED TO RENEW LICENCES ANNUALLY – PHYSICAL INSPECTION by LOCAL GOVT’s ENVIRONMENTAL HEALTH DEPARTMENT • When establishing a business it is the responsibility of the owner to ensure that hte business complies with all health and safety requirements stated in govt laws and regulations. If it does not the business could be sued for negligence if a person’s health is affected. Business may be prevented from trading

Other regulations There are many regulations that affect SMEs but the most well known are: • Competition and Consumer Act 2010 (Cth) formerly the Trade Practices act 1974 (Cth) re patents and licences. This is a federal government law that applies to nearly every aspect of the operation of a business. It controls and influences how businesses can act in the market when trading. The aim of the Act is to prevent businesses from gaining an unfair advantage over competitors. Under this act all businesses and consumers in Australia have rights and obligations including the following: • Products must be safe • Businesses cannot make false claims or mislead consumers in their advertising – e.g. Stating made in Australia when this is not true – only make in Aus can display AusBuy logo www.ausbuy.com.au • Goods must be priced openly. Prices cannot be fixed to prevent fair competition. It is illegal for sellers to agree among themselves to set prices at a high level Act prohibits any anti-competitive and unfair business practices that take advantage . ACCC enforces the act www.accc.gov.au

Patents

ACCC particularly involved in regulating and price fixing are: • Bank fees • Electricity and gas • Insurance • Petrol pricing • Postal services • Railways • Telecommunications

HUMAN RESOURCES Syllabus: Human resources: • Skills • Costs – wage and non-wage Having the right staff is very important to a business’s success. It is the employees who are the face of the business when dealing with customers and they perform the tasks planned by management

Skills • Employees must be an asset for the business • Must be hard working, share the vision of the business and be able to handle any change within the organisation • Staff need appropriate experience and skills to perform the tasks required • Newly qualified accountants/lawyers often ‘learn’ for 1-1.5 yrs before they are fully productive – business needs to spend much time instructing juniors on how to complete a job • Large businesses will have an HR department to organise complete training and development of new as well as current staff to enhance and improve their skills: mentor programs, tertiary study courses – all aim to improve skills so they become more productive and a greater asset to the business

Skills of staff • One of the most important influences when establishing a SME is staffing. • If a SME owner decides to hire staff, many sources are available. • The overriding recruiting objective is to attract a pool of qualified applicants with the most suitable skills. • Skilled employees are more productive and create wealth for a business. • A business will only employ someone if the return is greater than the cost

Costs

Summary • One of the most important influences when establishing a SME is staffing. • If a SME owner decides to hire staff, many sources are available. • The overriding recruiting objective is to attract a pool of qualified applicants with the most suitable skills. • Skilled employees are more productive and create wealth for a business. • A business will only employ someone if the return is greater than the cost. • On-costs are payments for non-wage benefits, including long service leave, workers’ compensation and annual leave loading. Chapter 11, Influences in establishing a small to medium enterprise, pg. 385

Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.6, pg. 386

Summary • Taxation is the compulsory payment of a proportion of earnings to the government. • Businesses are responsible for checking their obligations concerning group tax (PAYG), fringe benefits tax, goods and services tax, company tax, capital gains tax, stamp duty, land tax and payroll tax. • Goods and services tax (GST) is a 10 per cent value added tax imposed on most goods and services. • The customer pays GST when buying goods and services, which is passed on to the business that in turn passes it on to the Australian Taxation Office (ATO). • GST collection and payments to the ATO are recorded on the business activity statement (BAS), which is also the means by which a business can claim input tax credits. • The Australian Business Number (ABN) is a single identifying number that a business uses when dealing with government departments and agencies. • Property rates is the main local government charge a business will face. Chapter 11, Influences in establishing a small to medium enterprise, pg. 389

INFLUENCES IN ESTABLISHING A SMALL TO MEDIUM ENTERPRISE