Running a small business: Getting down to business

Don't want to go back to work after the holiday break? How about running your own business? Over the next two weeks WADE GLASS and GARETH HOOLE* will offer a detailed guide to what it takes to strike out on your own.


Napoleon referred to England as a "nation of shopkeepers". One wonders how he might have perceived New Zealanders, given that we have been identified as being the second most entrepreneurial nation in the world.

The concept of self employment is almost as dear to the average Kiwi heart as home ownership.

But venturing into the world of business is a far more daunting prospect than buying property and while it can reap huge rewards, it represents significant risk to the would-be business person.

Forming a new business is one of the most significant financial decisions you could ever make.

Often there is a great deal riding on the success or failure of the venture, including your hard-earned personal wealth and assets, which may have taken years to accumulate.

The unfortunate reality is that many fledgling businesses in New Zealand fail within a few years of starting.

As advisers we see many instances where promising ventures fail to make the grade because of poor planning or other controllable factors.

Most survive their first year unless they are hopelessly under-capitalised or mis-managed. The second and third years are crucial to long-term survival and success.

It is common (and sensible) for new businesses to have sufficient working capital to survive the first year.

However, years two and three are the "make or break" phase where the business will either begin to improve its cashflow as profits start to appear or rise, or fail due to poor sales or profitability.

There will always be risks associated with starting your own business but those risks can be reduced by following some basic business rules.

Over the coming weeks we will examine some of these rules which could make the difference between financial success and failure.

As a general rule there is a direct relationship between risk and return: the higher the risk the greater the potential return and vice versa.

Anyone planning on embarking on their own business venture will need to assess these risks, the likely return and ways to make the equation balance itself.

An example is a person deciding to buy a dairy in an established suburb. There is a regular customer base and the business is profitable.

These factors contribute to a lower level of risk for the dairy owner, meaning the returns (profit) he can expect from the business will be fairly modest.

This is logical, because if the business was to make millions, everyone would want to own a dairy and as a result the returns would diminish.

Contrast the dairy owner with the entrepreneur who has just opened a restaurant. The restaurant is aimed at up-market diners, is located in a new suburb and has to make a name for itself with its target customers. Will it succeed? Only time and the management skills of the owner will tell.

Which business would you choose?

There is no correct answer, but the restaurant owner would require a higher return than the dairy owner, as "payment" for the increased risk and uncertain future.

These articles are not intended to represent a business text book, nor should they be regarded as a substitute for professional advice.

However, they will hopefully outline some of the issues which budding entrepreneurs will have to consider and resolve if they are to survive in business.

In coming weeks we will cover:

* What type of business for you?

* Legal structure and ownership

* Business viability and planning

* Capital requirements

* Finance requirements

* Legal compliance and human resources

* Basic record keeping

* Performance management

* Professional advisers

While these articles are by no means exhaustive, they will hopefully get you thinking about some of the tricks and traps that lie ahead if you are planning to start your own business.

So, you have decided that working for a boss is not what you want and it's time to venture out on your own.

The first questions are what is the best type of business for you and what will it take to get into business?

Your business should be a combined reflection of your personal goals, skills and imagination. An essential starting point is to write down what you want your business to provide.

What has driven you to this point? Is it that you have a great idea which has enormous potential, or do you want something to provide you with a steady income and capital growth?

These will have been thoughts which you have had for quite some time, but the act of committing them to paper will assist in reinforcing the goals and purposes of the new venture and will require you to address matters such as:

* What skills do I have to contribute to the business?

* How much income do I need to generate to support my family?

* How many hours am I willing to commit every week?

* How will this affect my present lifestyle?

* How much capital do I have available to start my business?

Many a would-be business person is stopped in their tracks at this point as they realise that the planned changes will compromise their present circumstances too much, or they are not willing to make those extra sacrifices, or they cannot meet the capital requirements.

It is then you need to be honest and realistic with yourself to make sure that starting your own business is really what you want.

Do not let the challenges of owning a business discourage you. The excitement of your first sale or your first major deal will outweigh the work you face in getting to that point.

Business owners are creatures who enjoy "living" the business they create. Being in charge of your own destiny is a strong motivator.

You may enjoy the freedom of working when and how you choose, rather than adhering to rigid rules imposed by your current employer. Whatever your reasons, enough talk. Let's get into it ...

In our next article we will examine the types of businesses available to you.

Businesses galore

* New Zealanders are among the most entrepreneurial people in the world.

* The latest figures from Statistics New Zealand indicate that the country has one business for every six people in work.

* In February last year there were 294,954 businesses, an increase of 4.8 per cent on the previous year and 35 per cent of them were in the Auckland region.

* New Zealand businesses tend to be small. Statistics NZ's figures show that 86 per cent employ five staff or fewer. Just 1349 - or fewer than 0.5 per cent - employ more than 100 staff.

* About 24 per cent of these enterprises are individual proprietorships, as opposed to limited liability companies, mostly in construction, retail, property and business service sectors.


* Wade Glass (assistant manager) and Gareth Hoole (associate director) are chartered accountants in the Corporate Recovery Services unit of Staples Rodway, Auckland. The views expressed are their own and not necessarily those of Staples Rodway.