The 14 questions you need to answer to successfully establish a new business

Question 1: What’s your motivation?

There are several common answers to this question:

I want to supplement my income
I have a great new idea
I want to control my own destiny
I’m over 50 and no one will give me a decent job
I’m sick of the BS at work
I’ve lost my job.

All of these are good and valid reasons. The first answer has the greatest chance of success, the lowest cost of failure, and requires the least amount of preparation and planning. It is also a great rehearsal for the real thing later if the venture proves really successful.

The next one also has a pretty good chance if you have done your homework and confirmed it really is a new idea, and you can keep your enthusiasm under control until after you have done all the preparation in Questions 2 through 13. The next three have significantly less chance of success but can succeed with enough persistence and a bit of luck. Our advice to you is simple – don’t give up your day job, at least not yet.

The last one has the least chance of success, mainly because it is unlikely that you will have sufficient financial reserves to see it through to profitability, and you won’t be prepared for it emotionally.

The Guide Part 1 has more detailed explanation and provides both “do’s” and “don’ts” for each of the situations above, plus alternative ways of satisfying your motivation.

Question 2 – Have you done your homework?

According to the Australian Bureau of Statistics, more than 60 percent of small businesses cease operating within the first three years of starting. It’s an incredibly daunting figure and it’s something that’s thrown at many an enthusiastic businessperson who announces to the world that he/she is about to start a new venture.

If you don’t want to become another failure statistic you need to do your homework before you jump in the deep end. Here are just some of the things you need to consider:

Demand Analysis - Who are you hoping to sell your products to? (Customer demographics):

Who are they?
How old are they?
Where do they live?
Is the demographic increasing or decreasing?

Handy Hint: The Australian Bureau of Statistics is an incredibly valuable source of reliable data about the Australian economy.

Competitive analysis - Who else is selling the same or similar products/services?

Who are they?
How long have they been in business?
Where do they operate from? Bricks and mortar, online, both?
Is their number increasing or decreasing?
Are they profitable?
What stage of the product life-cycle are they in?

Handy Hint: ebay and the Amazon Marketplace are good places to research goods for sale. And the local shopping centre, of course. For services, the best places to look are the internet and trade magazines. The Yellow Pages are still a useful starting point to see which local businesses are offering the same or similar services

Question 3 – Have you done the numbers?

Having done your homework, it’s time to put some numbers on the information you now have. These are only preliminary numbers that will help you to assess the likelihood of your new business becoming profitable. As you progress through developing your Business Case, then preparing your detailed budgets, you will refine them. Depending on your products and services, your potential customers, and how you plan to conduct the business, these costs will be more or less important. Here are the major categories:

Set up costs

This is money you will have to spend before you start generating income and includes:

Office equipment and furniture - desks, chairs, cabinets etc.
Computers & software
Vehicles
Other plant and specialist equipment.

Much of this equipment can be leased, turning capital expenditure into operating expenses, but it does need to be paid for, plus interest, over the term of the lease.

You will also need to pay various government fees and charges to establish the business. These can include:

Company registration,
Business name registration
Trademark protection
Any applicable licences.
Legal costs

Recurrent expenditure

This is money you will need to spend to effectively operate the business. Some of it is relatively fixed, but others vary in accordance with sales. These are some you will need to consider:

Salaries, wages and temporary labour
Utilities, telephony, data charges and cloud services
Core business services such as accounting and legal
Insurances

Discretionary expenditure.

Probably the biggest ongoing expenditure after labour costs will be for sales and marketing activities – especially if you are going to be selling consumer items. This includes all forms of advertising. It is discretionary in the sense that, whilst essential to the growth of the business, is flexible in its timing and amounts.

Cost of sales

Cost of sales can include:

Purchase or production cost
Inbound and outbound packing and delivery charges
Storage costs
Sales commissions
Transaction card fees.

Sales (or revenue) forecasts

This is usually the most difficult thing to forecast, especially for a new business. There are so many things to consider that you don’t have any prior experience with. Still, you have to give it your best shot as it is the foundation of success.

Profit or loss

Profit is not the reward for risk-taking – otherwise banks would not make such huge profits. It is simply the difference between what you sell your product/services for and what it cost you to produce/supply the goods or services.

Handy Hint: You manage your business by numbers, so really need to understand them. You can’t delegate that to your financial advisor or accountant, they can only help you to interpret the results and advise you on possible courses of action. You have to make the decision. There are plenty of good books or online courses available.

Question 4 – Have you got a plan to succeed?

How will you measure success? Money in the bank? A big house and a couple of new cars in the garage? A yacht? An article on you in the business news? An enduring legacy for your kids? Personal satisfaction and validation? Or, just still being in business after a time?

Whatever your measure is – and they are all equally valid – you have to have a plan to reach it. Otherwise it is just a dream.

All successful action starts with a plan. It can be explicit, such as a detailed project plan, or it can be implicit, such as a set of objectives and the steps you need to take to reach those objectives.

There are six things you need to do to build a good project plan:

Prepare thoroughly
Document your plan
Identify dependencies and slack
Include regular check points to measure your progress
Identify and quantify risks
Prepare corrective actions to take on deviations from the plan.

There are many plans you will need to develop to effectively manage your business, but the two most important in the Startup stage are the Sales/Marketing Plan and the Financial Plan. The first builds on the information you gathered to answer Question 2. The second takes the Sales/Marketing plan and its resultant sales forecasts, plus the costs enumerated in Question 3, any planned capital expenditure, and the results of financing activities, to build the Financial Plan. More about that later.

Question 5: Have you prepared a Business Case?

It is highly likely that sooner or later you will need additional funding to run your business. Banks and credit unions are still generally the cheapest form of funding readily available.

When you get to the bank, one of the first things they will ask for is your Business Case – a document that tells the banker how you plan to make your new business profitable, and when. Among other things, it will contain forecasts of sales and costs and details of your marketing plans.

Even if you don’t plan to borrow any money initially, it will be a really good idea to prepare a Business Case, or pay someone to do it for you, then take it along to your nearest friendly banker and ask him to lend you some money. Very quickly you will find out whether your plans are sound or not. Banks are in the business of lending money, so if they won’t lend anything to you on the basis of your Business Case, I would listen really carefully to their reasons why, then go away and redo your Business Case to incorporate their feedback.

If you can’t make the numbers stack up on paper, there is a very good chance the business will not be profitable in reality.

The Business Case is an integral part of your Business Startup Project Plan. As you progress towards the first stage of implementing your Startup Plan, and at the completion of each stage, you will refine the Business Case.

Handy Hint: Most banks will have guidance in starting a new business on their website. Westpac’s website is a good example, but it is best to start with a bank you have dealt with before. https://www.westpac.com.au/business-banking/business-help/starting-a-business/

Question 6: Is now the right time?

This is your first BIG decision. A great idea at the wrong time is a bad idea. But it is really hard to resist the temptation to press the go button after you have already done all that hard work and preparation. This is one time you really must let your head rule your heart. Ask yourself these questions:

Are the market conditions right?
Is your personal situation right?
Do you have the right support?
Can you afford to fail?
Is your budget achievable?

If the honest answer to any of these questions is “NO”, then pause. If it is “I’m not sure”, then get more information to enable you to reconsider the question. If it is still “NO”. then pause.

I am not saying give up on the idea – just wait for a better time to launch.

There is an exception to this rule: if the market conditions don’t seem right, but you have enough financial resources to see out a period of losing money, then it may be a good time to launch as your potential competitors will be in a weaker position to respond.

Handy Hint: Take the worst-case scenario in your Business Case, then see if you could survive for two years under those circumstances. If the answer is “Yes”, then it’s probably safe to go, but be sure to have very well-thought-out contingency plans so you can react promptly and effectively if things are even worse.

Question 7: What business structure will you use?

This is your second BIG decision. There are six main options:

Sole Trader
Limited Liability Company
Partnership
Trust
Joint Venture
No Liability Company

The first three are the common ways of running a business, trusts are more a structure for asset protection and tax minimisation, whilst joint ventures are usually used by established businesses to expand into new areas of business. No liability company is a special form of business structure that can only be used for a business that has mining activities as its sole business. We won’t discuss the last three here, but the Guide provides some further information.

sole trader vs company

If your new business will be your sole source of income, your expected profit will be less than $125,000 per year, and you do not expect to incur significant business debts, then a sole trader structure is probably best for you. You can always restructure to a company later if your circumstances change

Source: https://www.business.gov.au/change-and-growth/restructuring/sole-trader-to-a-company/difference-between-a-sole-trader-and-a-companyABN and Business Name registration

Sole trader versus partnership.

A Partnership Agreement is a legal arrangement between two or more persons carrying on business in common for the purpose of sharing profit. Those persons can be companies, individuals or trusts. Some professions can only be carried on by individuals together as partnerships. The advantages of a partnership include direct distributions of profits, shared liabilities and contributions to capital. Some of the disadvantages include joint and, in some States, several liability for partnership debts. There can be tax advantages and disadvantages depending on the nature of the partnership business. You should speak with your lawyer, accountant and tax adviser on this.

Handy Hint: https://lawlive.com.au/australian-deed-of-partnership-agreement-template/

Question 8: What Government business registrations will you need?

These are the minimum business registrations you will need in Australia.

Company registration

If you have decided to use a Limited Liability Company as the vehicle for your business, you will need to register it. The Australian Securities and Investment Commission website provides Step by Step guidance to register a company. It currently costs $495 to register a company in Australia.

Business Name registration

You may decide that you don’t want to operate under your own name whether as a sole trader, a company or a partnership. In this case, you will need to register the proposed Trading Name. Registering a business name costs $36 for 1 year, and $85 for 3 years.

You can register a company using the Australian Government's Business Registration Service (BRS). BRS combines several business and tax registrations in one place, making it even easier to start a business.

Source: https://asic.gov.au/for-business/your-business/small-business/starting-a-small-business/small-business-registering-a-business-name/

Obtaining an ABN

An Australian Business Number (ABN) is a unique 11-digit number that identifies your business to the government and community. If you are a sole trader, you must apply for an ABN.

An ABN doesn't replace your tax file number, but it is used for various tax and other business purposes.

You can apply for an ACN and ABN in the same form on the Business Registration Service

Source: https://www.business.gov.au/Registrations/Register-for-an-Australian-Business-Number-ABN

Question 9: What other registrations might you need?

Not all businesses will need to do this, but most will.

GST Registration

If you expect to have a business turnover of $75,000 or more in your first year you must register for GST

Getting a Tax File Number (TFN)

If you are a sole trader, you will not need a separate TFN as all business income and costs will be recorded against you personally. If you are a partnership or a company, you will need to register for a separate business TFN.

Fringe Benefits Tax Registration

If you are a company and plan to offer non-cash benefits to employees or directors, such as a work car for private use, low-interest loans, or movie tickets, you must register for Fringe Benefits Tax.

To comply with the law, your business may need specific registrations, licences or permits. Which ones you need will depend on your business structure, its location, whether your business employs staff and the type of business you're operating.

Handy Hint: The easiest way to obtain all State, local and Australian government licensing information is to visit the Australian Business Licence and Information Service (ABLIS).

Question 10: Will you need Intellectual Property protection?

If you have something distinctive about your business that distinguishes you from your competitors, such as an image, a colour, a word or a phrase, then you should seriously consider registering it as a business Trademark. This will prevent others from copying or using your image, colour, word or a phrase in association with their own business.

Trademark registration is not cheap - $250 per trademark per class of goods/services that you want to apply the trademark protection to for a standard application, and $330 per class for a pre-assessed application. There are complexities in the process, so we recommend that you consult us for advice before submitting your application.

Handy Hint: Trademark applications can be lodged through IP Australia.

Question 11: How will you finance the business?

This is the third BIG decision.

Greg Hayes from Hayes Knight Accountants & Advisers told The Huffington Post Australia there are varied reasons why most Australian small businesses struggle to survive.

“One of the key reasons is that many small businesses start with a bad idea -- an idea that was never going to work. But the biggest reason for failure is a lack of capital. It’s a common story that many people go into business under- capitalised and they just run out of money,” Hayes said.

Source: https://www.huffingtonpost.com.au/2015/09/28/small-business-failure_n_8187166.html

The basics

Opening a bank account

If you are operating your business as a sole trader, it is advisable to set up a separate business bank account to keep your personal expenditure and income separate from your business expenditure and income. This will make it much easier to manage the business and. particularly, meet your taxation obligations.
If you are a company, you must set up a business bank account.

Buying goods and services

When you set up your business bank account you should request one or more business debit cards. This can be used to purchase incidental items at retail level or online. For larger items of expenditure, it is usual today to pay by direct debit or BPay. Your business PayPal account can be used both to receive payments from customers and to make payments to suppliers.

Receiving payments

There are three common options:

Credit cards or debit cards
PayPal
Direct deposits

There are advantages and disadvantages of each depending on your typical customer profile and the nature of the goods/services you are selling.

Borrowing money

Short-term options:

Overdraft
Credit cards
Factoring
Trade creditors
- Medium term options:
Secured borrowings
Line of credit
Bill of exchange
- Long term options:
Share issuance
Debentures

Handy Hint: You MUST have a basic understanding of business finance, even if you plan to engage external services to help you with it. Here is a good source of introductory information to get you started: Small Business Finance for the Busy Entrepreneur: Blueprint for Building a Solid, Profitable Business

Question 12: How will you promote the business?

This is the fourth BIG decision.

Without customers you don’t have a business. Even the best new mousetrap ever won’t bring you fame and fortune unless potential customers know about it. The Sales & Marketing Plan describes how you will make potential customers aware of your products and services, and how you will interact with your customers on an ongoing basis.

The Sales & Marketing Plan is really two separate plans, but in the Startup stage we can consider them as one. The sales plan describes the distribution structure you will use to interact with your customers.

There are two basic distribution structures – direct and indirect. A direct distribution model is when the manufacturer sells directly to the end user and manages all the logistics activities required to get the product to them. In this model the manufacturer employs a salesforce to interact with customers directly. They may also have an online store to sell their products through. The sales plan comprises activities designed to get the get the end user to change their purchasing plans, such as by buying sooner rather than later, in larger quantities than intended, or from you instead of your competitor. The marketing plan comprises activities designed to make potential buyers aware of your business name or brand, your products and services, to support the sales plan and to generate leads for your salesforce.

An indirect model involves a hierarchy of channel partners, including importers, wholesalers, distributors, and resellers. For consumer goods, this hierarchy is called retailing. The salesforce consists of account managers who interact primarily with the distributors, a small number of major customers and sometimes with the end users in support of resellers. The marketing plan is similar to the direct model but can involve substantially less spending on advertising as the resellers or retailers themselves spend money on advertising to attract customers to their premises.

Services businesses usually sell direct, manufacturing businesses may utilise either model.

Handy Hint: Work at Home Woman has an excellent comparison of the advantages and disadvantages of each, and also some handy tips for working from home.

Question 13: How will measure your progress?

It’s important to have a plan, but it is at least as important to measure your progress against the plan. It is said that you can’t manage what you don’t measure, and this is especially true of new businesses where there are so many things to do to implement your great new idea that seem to need priority over the mundane things like billing and records keeping. But don’t be misled – they may appear boring, but without them you don’t have a business. The best way of measuring progress against plan is via budgets – provided your budgets are properly structured to take account of things such as seasonality and have a realistic time profile for achievement of your sales forecasts.

Handy Hint: Preparing budgets and financial control are complex subjects. A good introduction can be found in Small Business Accounting: The jargon-free guide to accounts, budgets and forecasts.

Question 14: How will you manage the risks?

“The best laid schemes of Mice and Men

oft go awry,

And leave us nothing but grief and pain,

For promised joy!”

Robert Burns, Scottish national poet (1759 - 1796) from his poem To a Mouse

"Anything that can go wrong will go wrong".

Murphy's law

"In this world nothing can be said to be certain, except death and taxes."

Benjamin Franklin (1706-90) from his letter to Jean-Baptiste Leroy.

Whilst Murphy’s Law may be unduly pessimistic, the truth is that we live in an uncertain world, and the pace of change is accelerating, bring with it even greater uncertainty.

Risk is the likelihood that something unfavourable will happen. Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.(Wikipedia).

Your Business Case has a section for risk, and your risk management plan makes those risks explicit, and identifies treatment to minimize or eliminate them. Similarly, your Startup Project Plan should have a Risk Register, to record those risks and others which are identified as the project progresses.

A forecast represents some form of extrapolation from past experience, and for any given time frame, has a range of probable outcomes. Your budget contains lots of forecasts, but only the most likely outcome of each. Sensitivity analysis uses the “likely best case” and “likely worst case” for each of the major budget variables to calculate the impact on your Financial Plan. If the analysis shows an outcome that is beyond your capacity to absorb, then you should prepare an explicit contingency plan that has other key variable flexed to minimise the impact should it happen.

Handy Hint: Excel Sales Forecasting For Dummies “… leaves arcane business school terms and complex algebraic equations at the door, focusing instead on what you can do right now to utilize the world's most popular spreadsheet program to produce forecasts you can rely on.”