Starting & Running a Small Business

Introduction

So, you want to be in your own business. Perhaps you're presently employed, and feel that you're destined for better things, or maybe you're semi-retired or have come into some money and feel you've got what it takes to join thousands of other small business operators in New Zealand. And not to be one of the 80% of small businesses that don't last five years. Or perhaps you've already taken the plunge and now feel the need to re-focus.

Running your own business is not for the faint-hearted. You have to assume that, in the early years particularly it will dominate your life, and absorb all your free time like a giant sponge. It will place stress on your finances, and it can ultimately affect your health. You probably know someone who has suffered from some or all of these conditions as a result of being in business.

However, running a successful small business can also be tremendously satisfying and financially rewarding. You can end up working fewer hours, making more money, deriving great satisfaction, and all the time building up a nice little nest egg. You probably know someone in this position too.

Probably, it is this latter aspect of running your business that has set you on the starting blocks and that's fine. You need drive and commitment that is fired by a positive vision of the achievements and rewards that are possible.

However, you must enter the whole process with your eyes open and be aware of the traps, the downfalls and the risks as well as the opportunities. The only way to make an informed decision is to have all the options at your fingertips. For your business to have any sort of chance of success, all your business decisions must be informed decisions, from the prosaic 'What colour will I paint the office walls?', to the profound 'How and when will I take on staff?'.

This article illustrates the issues in a simple, non-technical manner. It's been written so that you can read it easily and also use it as a reference as your business moves through the various stages.

But a word of warning: no article or book can replace professional advice. You should surround yourself with wise and learned people; an accountant, a solicitor, perhaps other consultants, and look upon them as important business resources. Involve them in your business decisions, and profit from their experience.

Remember that even though these professionals may not know your type of business in the same intimate detail as you, common threads run through all businesses, and their experience can be of great assistance in directing your business along the path to success.

THE DECISION

"I love being my own boss - it means I can choose to work any 70 hours a week that I want!'" Anon.

Will I or won't I...

The first decision you need to make concerns you. Do you have what it takes to run a small business?

No matter what the business opportunity is, you must have drive and determination, and not be afraid of hard work. If this isn't you, don't give up your present job.

Your family will need to be behind you all the way. As a small business owner, you will almost certainly be working harder than you ever did as an employee. You will also lose the security of a guaranteed pay packet each week. Your family will need to understand that they may see less of you, that you may appear pre-occupied or worried at times, and that household finances may be tight from time to time.

RUNNING YOUR OWN BUSINESS - A PERSONAL CHECKLIST:

Drive, determination and passion
An understanding family
Patience - more than ever before, the customer is always right
The ability to learn from your mistakes
Willingness to work long hours
Willingness to perform mundane tasks - as the proprietor, the buck stops on your desk
A realistic understanding of your own strengths and weaknesses
A willingness to seek and accept the advice of other people

FIVE WRONG REASONS FOR STARTING YOUR OWN BUSINESS:

Reason 1: I'm tired of continually being told what to do by a boss.
Being in business for yourself certainly removes the boss figure, but replaces it with something far more demanding: the Customer. And whereas bosses have to be fair and reasonable in their dealings with you, customers don't.

Reason 2: I'm tired of working for peanuts.
Having your own business is no guarantee of making enough to cover your own wages. Just because you work so many hours each week, there's no guarantee that there'll be enough money in the bank at the end of the month to cover what you might consider a fair salary. Your employees, your landlord and your suppliers, even the government, all get paid before you do.

Reason 3: I reckon I'm smarter than a lot of people already running successful businesses.
Intelligence is a fair way down the list of things you need to run a business. Ahead of it are perseverance, initiative, perseverance, drive, perseverance, passion, perseverance, with a bit of good luck thrown in.

Reason 4: I want to work more flexible hours.
With many small businesses, this wish will come true only if you remove the word "flexible". Sure, you may be able to structure your business affairs around having the occasional half day off, but in the main, you'll need to work the hours that suit your customers, and then some.

Reason 5: Running my own business will be easy.
Wrong, wrong, wrong. Added to the normal responsibilities you've got as an employee, there is the financial risk, and the need to become "jack-of-all-trades". And, of course, you give up the guaranteed pay packet, paid holidays and sick days, superannuation and other perks. But perhaps the biggest difference between employment and self employment is that when you're running your own business, the buck stops on your desk. As the owner, you can't say "it's not my responsibility" or "I don't know anything about it". The consequences of ignoring it affect you directly.
Ask anyone running their own business. They might say it's rewarding, satisfying, even profitable, but they'll never say it's easy.

Still with us?

Okay, now that you've qualified on the personal front, let's examine the business opportunity.

Will my idea work?

For any new business to succeed, one or more of the following situations should exist:

(a) the market has grown to the point where new customers can no longer be served properly by existing businesses;
(b) customers' needs are not being adequately taken care of; or
(c) the product or service you are planning to offer is not being offered by existing businesses.

If your idea does not fit into one of these categories, you may have a difficult - but not impossible - job in competing with established businesses.

The next step is to take a more detailed look at your proposed business. The best way to do this is to look at the 'business plan'.

The need for a plan

Whether you're starting a new business, buying an established business, or taking on a franchise, the business plan is vital. The importance of it cannot be over-emphasised. At the very least, it will make you think about a few areas that you may otherwise have overlooked, but it may also save you from making a very costly mistake. It's also a good way of illustrating to third parties (your bank, for example) that you have thought about all the issues and you know what you're doing.

It's important that the business plan is done before you commit to the new business, as you may discover things that make the business opportunity unsuitable or not viable. And even though some aspects might appear obvious or intuitive, it is still important that you build them into your plan.

It is wise to seek the services of an accountant to help you though this process. They will be able to apply their experience and knowledge to your particular situation. They will also be able to offer technical assistance with projections, and in drawing up projected profit and loss statements, balance sheets and cashflows.

Whether or not you appoint an accountant now, you should still work through the business plan process by yourself in the first instance. It may save your accountant some time later, and it gets you thinking about the various issues before your first meeting with them.

The business plan process can be broken up into five parts:

Financial assessment (will it return sufficient profit?)
Cashflow projections (how much cash will be needed?)
Mission statement (what is your goal?)
Five year plan (how will these goals be achieved?)
Market placement and potential (what distinct market need are you filling, and what distinct benefits are you offering your customers?)

As you can see, these are fundamental to any business, and in examining any or all of them you may uncover facts that tell you the opportunity is not worth pursuing. For example, if the financial assessment suggests that you would not be able to make a profit, or the cashflow projection indicates you need more cash than you have access to, don't proceed any further.

Computer spreadsheets are very useful for performing these calculations. Your accountant will have the necessary expertise to refine your calculations using one of the popular spreadsheet programs.

The following sections look at each of the elements of a business plan in detail.

The remainder of this article has been divided into chapters. Click on a link below to view a chapter (PDF):

A Question of Profit

Mission and Market

SWOT Analysis

On the Starting Blocks

Money Matters