AVOIDING THE TRAPS: Avoid Some of the Most Common Traps in Business
Investing in your future will take time and effort. Being your own boss, controlling your destiny can be rewarding, however, as with most things in life it also carries responsibility.
In any business there will be a wide range of risks to consider. Some risks once identified and understood can be reduced. By reducing risk the chances of business success improve dramatically.
This list is not exclusive. No doubt there will be other aspects you will need to consider after taking your particular circumstances into account.
Take time to understand the cash flow cycle of the business. Consider where your customers will come from, how they will pay, any seasonality and when you need to pay creditors and taxes. Build a comprehensive list of assumptions and satisfy yourself of the ongoing viability of the business. This is especially important if the business is new and you are basing your projections on advice alone.
Don’t overcommit yourself and keep your business and personal debt to manageable levels. Be wary of financiers who say they will lend you extra money without a proper assessment. Look at the repayment structure and interest rates. Be cautious in committing the business cash flow to non-business related purposes. For example, buying a more expensive house will add nothing to the value and productivity of your business and will become a problem if business cash flow tightens.
While depreciation is charged against business income and lowers net profit it establishes a need to continually reinvest in the business. Depreciable items whether they are a car, computer or floor coverings will need to be replaced. Failure to do so may impact business sales or add to maintenance costs and reduce productivity. Ideally set up ‘sinking fund’ to deposit money to be used to fund future upgrades and replacements.
‘Own’ The Business
It’s your business and you are responsible for everything! This includes ensuring employees are paid correctly and taxes are paid on time. As a business owner it comes down to understanding how to build revenue while watching costs. Take an active role in the management of your business and don’t look to delegate this responsibility to others.
Managing through the Good Times
Don’t become complacent if things are going well. Make sure your business decisions take an inevitable change in business activity into account. Ensure budgets are set and regularly monitored. Take care in committing future cash flow to non-business related purposes. Look for any signs of deterioration and take decisive action early. Specifically, monitor sales levels, gross profit margins and labour costs.
Fall Back Capital
Ensure you have quick and easy access to additional capital if required. Even in the best of businesses with considerable planning things can go wrong. An unexpected event can impact your business and access to additional capital may need required. The amount of back up capital will vary depending on the business, however, start up (green-field) business will require higher levels of reserves until proven.
Business conditions and confidence will be impacted by local and international events. Business owners need to understand how their business will be affected by changes to economic conditions. As an example, what is expected to happen if interest rates increase or exchanges rates change?
Always get the best independent business advice you can find. This will include accounting and legal advice using advisors with appropriate knowledge of your industry. You may also have a financial advisor, banker, business coach or mentor who is able to assist with your business decisions. Businesses need to continually evolve and move in line with customer and community expectations.
Understand business values
Cost does not necessarily reflect value. Set up costs or price paid may or may not represent the ongoing value of the business. When considering the purchase of an existing business look at the historical performance, lease terms, franchise terms, condition of the fit out and equipment. Consider any capital expenditure required and speak to both the franchisor and landlord. Obtain independent advice on the businesses value to support your offer to purchase. When establishing a new location the set up costs may exceed the businesses value until such a stage the business builds to a predetermined level of operating profit.
Research - Industry, Competitors, Regulation
As a part of your assessment process undertake detailed research. This would include considering the industry, competition (local and more widely if relevant), and regulation. All affect businesses in different ways however these impacts can be significant if not fully understood. For example, consider how the supermarket sector has been impacted by additional competition, changes to retail trading hours, supplier pricing, internet ordering and delivery etc.
Understand time commitment
To operate successfully a business owner will need to commit significant time and effort. Operating a business is never 9am to 5pm Monday to Friday. Taking time off for holidays can be difficult and requires planning and flexibility. It may take some time to get the business operations to a secure position before taking a break.
Impact on Relationships
Relationships can change under the additional stress of running a business. Take the time to understand the expectations of business and life partners and others impacted by the business. Make a plan and always keep communication channels open.
In summary, starting up a new franchise or purchasing an existing business can be an exciting and rewarding time. Taking time to understand the business, obtain advice and build a plan is an important step in investing in your future.
Steve Seddon is a Senior Business Development Manager with Westpac. He specialises in the franchise sector and is on the Franchise Council of Australia Western Australian Committee. He holds a Bachelor of Commerce degree, Diploma in Franchising and is a qualified CPA.
Westpac has supported the franchise sector in Australia of over 25 years. The bank has a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector.
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