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RETIREMENT & LIFESTYLE PLANNING | |
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Unfortunately, the dreams often come to a sad end and, in severe cases, even end in bankruptcy. Is this a reason to avoid going into business for yourself? Not at all. Owning your own business gives you the opportunity to choose both the hours you work and your income. Unfortunately, the fact that 52 per cent of businesses fail within the first three years is proof that small business is harder than it looks.
Here then are some simple rules to help in the move from employee to employer.
Take the time to gain experience in the field in which you intend to operate before you take the plunge. For example, if you want to start a restaurant, work in one for at least a year first. Also, understand that the skills of "doing" are different to the skills of running a business. You may be the best plumber in the world but once you start your own business, you’ll need to be able to cost jobs, hire and fire staff and manage the accounts. Too many tradespeople make a bare living because they don’t manage their time properly and undercharge.
Be aware of the danger of discounting. Few business people understand the difference between gross income and net profit and can let themselves become seduced by the large amount of cash that flows through their business. A $4 million dollar turnover giving a $400 000 a year net profit may sound great, but all the owner of that business has to do is give a 10 per cent discount across the board and the entire annual profit is wiped out. Conversely, increasing your sales can provide a disproportionate increase in profit. For example, if our $4 million dollar business increased its sales by just 10 per cent to $4.4 million dollars, it could well increase its profit by $200 000 to $600 000. Yes, an increase in sales of 10 per cent led to an increase in profit of 50 per cent.
Focus on staff training. It is well known that efficient, friendly, helpful staff can dramatically increase both sales and profits, yet how many times have you walked into a business and been treated like a leper. By continually training your staff and by providing a spotless and friendly place of work, you’ll be substantially contributing to your profits as well as your quality of life.
If you are buying a business, regard all statements made by the vendor with scepticism. Sure, I know about sellers who with a "nudge nudge wink wink" confide that a large proportion of cash is being skimmed out of the till. The problem is that the seller has just admitted that he’s been lying to the tax office for years. Why would he be honest with you?
Also, make sure a competent accountant looks at the last three year’s financial statements and makes adjustments where appropriate. Too many people buy a business and discover within a few weeks that it is not performing as promised. They then face the difficult choice of working it up, or taking legal action against the seller. Legal action is stressful and costly and the outcome is never certain. It is usually not an option for people who invested their last dollar into acquiring the business. Often the proprietors work in the business themselves and their wages are not shown in the profit and loss account. If you intend to employ staff to do the jobs that were being done by the outgoing proprietors, the accounts will need to be adjusted for the extra staff you will need to employ to replace the work done by the vendors.
Don’t get carried away with sales, always focus on profit. In our book Driving Small Business, we discuss the person who was considering buying a franchised bookstore with a million dollar a year turnover. When you consider the gross mark up is around 45 per cent, it seemed like a dream come true. However, rents were 14 per cent of turnover, the franchise fee was seven per cent of turnover, and the actual gross profit after allowing for normal discounting and theft was 24 per cent. This meant the gross profit was $400 000, from which must be deducted $210 000 for rent and franchise fees leaving just $190 000 a year to cover all other running expenses of the business including wages, electricity and phone, as well as the opportunity cost of the capital required to buy the business.
A vital point in business planning is having the right structure from the start. Obviously this is an area where expert advice should be sought but bear in mind we now live in a litigious society and a major factor in deciding the best structure is protection of the owner’s personal assets. This is why I suggest the use of a family company or a family trust. As well as putting a shield between the owners and the business, it also enables superannuation to be contributed as a tax deduction and also the sheltering of income in lower tax brackets. For example, company tax is only 30 per cent and profits can be left in the company indefinitely.
Finally, remember that Quakers were the most successful business people in Britain in the 19th century. The reason was that they operated from three major tenets. The first was absolute integrity, which meant that their customers were always assured of a fair deal and returned to do more business. Second, they kept meticulous, up-to-date records so they always knew how their business was performing. Finally, they had a strong mentoring and networking system so there were always other people available when they needed advice. It’s hard to think of three better principles on which to run a business.
Noel Whittaker is a Brisbane-based financial adviser and author of 10 books about personal finance.
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