STARTING A BUSINESS

You want to go into business working for yourself. Perhaps you are a middle manager who has recently been retrenched and now you want to "buy" yourself another job with your redundancy cheque. Or perhaps, you have been working for someone else for many years in the same business, you are very experienced and now you wafnt to start up on your own. Or perhaps you are a married woman who wants to return to the work-force but on a self-employed basis.

The first thing you should ask yourself is Am I the type who is likely to succeed in business? It is a sad fact that some 80% of small businesses fail in the first five years of operation. You will need good health. Self-employed persons often work much longer hours than employees. Have I a head for business? You will need a certain amount of basic education to handle the paper work. You must also be the type who will allow money to accumulate. For one thing, you must have money in the bank to pay your suppliers and also to pay your tax-bill in one lump sum annually. If you are the type who spends every cent he can lay his hands on, then this could be a warning sign.

What experience or skills do you have? It is most unwise to go into any business without some experience in that business. For instance, if you are thinking of setting up a clothing shop, you would be well advised to work for at least a year in a clothing shop, if you do not have that experience already.

Once you have decided what type of business you want to set up, you must do some research. A business can be sited 1) where people work. For instance, if you want to set up a stationery business, you would normally site it in the central business district. A business can also be sited 2) where people live. For instance, a grocery store will normally be sited in a suburban shopping centre. And lastly, a business can be sited where the product sold is used. For instance, if you want to set up a fishing-gear supply business, you could site it near where the fishing is carried on. Ask yourself, who will buy what I want to sell? Where are they located? Are they young or old? Are they affluent or not-so- affluent? Is the population in the area expanding or declining? A district with new people moving in is always a desirable place to locate a business. What is the competition? Does the area already have the type of business you want to set up? What is the catchment area?

Let us suppose that you have worked for many years in a shoe- shop selling shoes. You now want to open your own store. You have decided against buying an existing shoe-shop or joining a franchise set-up. You are in good health. You have looked around your city and you have located a new shopping centre being built adjacent to a new housing estate. The housing estate will be populated mainly by young families. The shopping centre management informs you that a shop is available and that, if you take it, yours will be the only shoe-shop allowed in the complex. What are the steps you should take from now on?

Firstly, examine the lease being offered. Does the lease limit the number of outlets competing with you? How is the rent calculated? Do you pay a percentage of sales? How are increases in the rent calculated? For how long is the lease? Do you have an automatic right to renew it? Can you sublet part of the premises? Can you assign the lease? (i.e. sell the lease to someone else). You should aim for at least a lease of three years with an automatic right to renew it for a further three years. You are happy with the lease being offered. The next thing is to arrange finance. You realise that you do not have sufficient funds of your own. You arrange an appointment with your accountant. He does a forecast of your first year's trading based on the information you give him. This shows estimated sales, estimated itemised expenses and the resultant Net Profit. Now, you estimate the start-up costs like buying fixtures, fittings and equipment. Also, any initial advertising and promotion costs. You estimate how much money you will need to draw from the business each week as wages for yourself. From all of this information, your accountant produces a Cash Flow forecast for the first year of operation. This shows your expected cash income for each month and your expected cash outlay, with the resultant bank balance at the end of each month. Ask your accountant to work out your tax based on the Income Statement forecast and tell you when it will be payable. You MUST save up for this.

You make an appointment with your bank manager. You show him the Income Statement and the Cash Flow Projection prepared by the accountant. The Cash Flow Projection shows you need a loan of $50,000. Your accountant reckons that you will be able to repay the loan out of retained profits in five years. You explain to the bank manager what "collateral" you can provide. Your spouse, who has a good job, will guarantee the loan. You will provide a chattels' mortgage over the equipment. If necessary, the bank can take a second mortgage over your residence. You explain that, to date, you have paid off half of the existing mortgage on your residence so that there is a good amount of equity in the residence. The bank manager approves a loan of $50,000 repayable in monthly instalments over five years.

Now, you must decide on your business structure. You could trade as a Sole Trader, a Partnership or a Limited Company. Limited Companies are not now as popular as they once were. It costs $1,000 approximately to set one up. There are ongoing administration costs and you could end up paying substantially more in capital gains tax when you sell the business. Another alternative is to form a Partnership with your spouse. However, this is only of value if your spouse will have an income substantially less than the income you will have from the business. In many cases, this is unlikely. If your spouse is a partner, he/she would also be liable for the debts of the business. You decide to go it alone as a Sole Trader. You will pay your own tax and be solely liable for the debts of the business. However, you decide to register a Business Name, "Budget Footwear".

You decide on an "open-plan" store, displaying as much merchandise as possible to the passing customer traffic. Now, you decide on what fittings and equipment you need. This will not be extensive. Racks, shelves, chairs, cash desk, cash register, fax machine, phone answering machine will probably suffice. Remember, you may have to collect goods from showrooms, airport etc. You will need an appropriate vehicle.

You sign the lease. You arrange to have phone and electricity connected. You arrange to have a sign-writer paint your Business Name. Perhaps you arrange to have it painted on your vehicle as well. You open a bank account under the Business Name. You rent a Post Office box. You arrange insurance. Fire, Workers Compensation and Public Liability would be the main insurances. You register with the Taxation Office and obtain a Group Number. You register with an insurance company for the compulsory superannuation levy. You obtain the appropriate employees Award from the CES or other government body. You have some rubber-stamps made. You have some letterheads and business cards printed. You buy other stationery requirements.

Now you must obtain stock. As you have worked in the industry previously, you will know of the main suppliers of footwear. If you were new to the business, you would look up the Yellow Pages under "Footwear - Manufacturers and/or Wholesalers". Once you become established, you will have "reps" calling on you to take your orders for stock. You visit a number of show-rooms and factories and order quantities of what you think will sell in your area. From your observation of the people in your area, you have concluded that there will be little demand for up-market footwear and that the main criteria for buying will be price and durability. You order mainly what you hope will be fast-moving stock. Beware against ordering too much or too little. To guard against this, you will have to do a forecast of how much you expect to sell per month. Normally, stores order two to three months supply. All deliveries must be counted and checked against invoices.

Now, you arrange advertising and promotion. You aim to open the shop with a bang. You visit the local newspaper offices. You arrange some advertising and, at the same time, you ask them to do a feature on your store on opening day. You have some thousands of handbills or "flyers" printed. You arrange to have these distributed in your catchment area. You decide to have children's shoes on "special" on opening day i.e. you sell the children's shoes at about cost on opening day. You arrange a series of adverts on the local radio. You contact the phone-book Yellow Pages and arrange advertising for their next issue. You order a few thousand carrier bags with your shop name emblazoned on them. Most sporting events involve the wearing of footwear. You might sponsor an event and donate appropriate footwear to the winner.

You conclude that you will need one part-time assistant. You arrange further advertising in the newspaper. In the advert, you stipulate that you want someone experienced in working in a shop, preferably a shoe-store. You will have plenty of applicants. You should be especially concerned with the honesty of the person as he/she will be handling cash and goods. You interview and choose one and arrange a starting date.

You must now give some thought to your record-keeping. The bank account will be the foundation of your record-keeping. You obtain a cheque-book containing at least 100 cheques. You obtain a large duplicate deposit book. You make it a rule to pay all expenses by cheque, never in cash. You make it a rule that all moneys must be counted at close of trading, reconciled with the cash register and banked that day. No money must be taken out of the till to pay expenses. You obtain two "concertina" files. One you keep for unpaid invoices and statements and the other for paid invoices and statements. You buy an 18-column Cash Book. You intend to write this up yourself, month by month.

Now, you are all set for opening day. Good luck!

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Copyright 1994.



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