INFLUENCES IN ESTABLISHING
A SMALL TO MEDIUM
ENTERPRISE
HOW ENTREPRENEURIAL ARE YOU?
DO YOU HAVE WHAT IT TAKES?
Your task 3-4 mins
To create a profile of a successful business person
operating an SME:
What does a successful business person look like?
1. What personal qualities?
2. What qualifications?
3. What skills?
4. What sort of motivation?
5. Do they need to be entrepreneurial?
6. Is there a better cultural background for establishing a
business?
7. What gender should you be?
What experience
There is no such thing as the right sort of experience to
set up your own business...!
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.3, pg. 342
What are the personal
characteristics of a typical
entrepreneur?
CREATE A MIND MAP
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.5, pg. 345
Why would you want to start
your own business?
WHAT ARE THE REWARDS OF BUSINESS
OWNERSHIP?
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.4, pg. 344
SOURCES OF ADVICE TO HELP YOU SET UP
YOUR BUSINESS
Research local, state and federal government agencies
and non-governmental organisations that can
provide information to assist entrepreneurs:
What websites or places can you turn to or click on
for support?
You should have already done this for your business
plan...
SOURCES OF ADVICE
 http://www.abs.gov.au/
 Networks
 http://www.ausindustry.gov.au/Pa
 Trade associations
ges/AusIndustry.aspx
 http://www.nswbusinesschamber.
com.au/Home.aspx
 http://www.becaustralia.org.au/
 Federal, state and local
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government departments
Accountants
Solicitors
Bank Managers
TAFE colleges
Universities
WHAT ARE THE DIFFERENT WAYS TO
ESTABLISH A BUSINESS?
Establishment options for a business
1: create a new business from scratch
2: Take over an existing business that already has
a good reputation: good links with suppliers and a
track record of trading.
3: Franchise: a business pays for the right to use an
established businesses' trade name and business
formula – the franchisor is hte seller of hte business
concept
What are the advantages and disadvantages
of each type of business
FILL OUT WORKSHEETS
 Starting from scratch
 Buying an existing business
 Franchising
Advantages and disadvantages
of establishing a new business
from scratch
ADVANTAGES
DISADVANTAGES
Advantages and disadvantages of starting a
new business
advantages
 Owner is free to make every
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decision
Less expensive to establish than
an existing business or
franchise
Can choose an ideal location
Can select own name
No goodwill to pay for
No hidden problems from the
previous owners
If funds are limited, possible to
start on smaller scale
disadvantages
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Harder to obtain debt finance without a past
record or sales
Can take months or years to break even and
earn a profit; slow to build a customer base
Need time and energy to recruit and train
staff
No network of suppliers establishes; no
goodwill with customers
Time delays in building, setting up the work
place, gaining licenses/permits, business
registration
No past records of business performance
No procedures in place
Existing and potential clients are unknown
Buying an existing business
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Business can be purchased as a
turnkey operation: all systems,
procedures, policies and operations are
in place and no changes are needed to
improve the business
Total cost is known
Loyal customers already exist,
generating income immediately
Advice and assistance may be sought
from existing trained staff and former
owners
Business has already passed through
difficult establishment and possibly
growth phase
Easier to obtain finance as has past
records of performance and established
cash flow
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Restrictions in size, procedures and
layout
Existing image and policies of the
business may be difficult to
change/hard to shake poor reputation
Inefficient systems and operations can
be difficult to change
May be difficult to assess the value of
goodwill
If the business premises are leased, the
new owner may have difficulties with
the existing landlord
Some employees may resent change of
owners
Past success may be based on
personality/talent of previous owner
Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.2, pg. 360
Buying a franchise
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Only about 12% of franchises fail
Expert backing and advice provided by
franchisor/training
R&D carried out by franchisor
Suppliers and materials already
established
Immediate benefit from franchisor’s
goodwill
Well-planned advertising often exists
Volume buying is possible, often
resulting in cheaper stock
Well established procedures, inventory
control systems (JIT) and operating
manuals
Selling a proven, well-established,
profitable product
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May cost more to establish franchise
than start anew business
Franchisor controls the overall
operations
Threat of franchise termination can be
carried out in some circumstances
Profits must be shared with franchisor
Goals of franchisor may be
incompatible with those of the
franchisee
Poor service and products provided by
one outlet ay adversely affect other
outlets
The franchisee may feel like an
employee, without the benefits and
security
Products may become ‘out of date’
resulting in decreased sales and profits
Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.3, pg. 361
QUESTION
EVALUATE THE CHANGES IN THE BUSINESS
ENVIRONMENT THAT HAVE AFFECTED THE
SUCCESS RATE OF NEW BUSINESSES
Market analysis!
Syllabus points:
Market: goods and/or services, price, location
Why is market analysis important?
What is market analysis?
A market analysis involves collecting, summarising
and analysing information about the market
WHY IS MARKET ANALYSIS
IMPORTANT?
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Businesses fail without a market (customers) for their goods or services, so they must
always undertake a market analysis
 Goods and/or services:
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You must be very familiar with the good or service that you wish to
sell
Research to determine the size of the market for your product and
where the actual target groups are located e.g.?
Identify your target market – who are they and how will you
advertise them.
Research area where you will sell your product to find out age, sex
and occupation to see if there will be demand for your product there
Make sure product is not a ‘copy’ of an already existing business
PRICE
 Need to establish an appropriate price for the product offered to the
market
 Price the business can charge will be determined by prices of similar
competitors’ products
 You need to know what it actually costs you to product the good or
provide the service (COGS)
 You will need to have a price high enough to make a profit (price
cutting in order to compete would probably result in a loss and closure
of your business)
PRICE: summary
Price can be set by following a recommended retail
price, using percentage mark-ups, price leadership
or finding what the market will bear.
Location
• One of the key decisions of a prospective small business
owner is concerning the actual location of the business.
 Cost to rent or buy the site is always a key consideration, but
depending on the type of business that is being established, the owner may also want to consider visibility, the
proximity of suppliers and support, and even whether or not the area chosen will lend the business an air of
professionalism.
• Different types of business will be suited to different
locations
Retail/service sectors: high visibility and high traffic levels.
Wholesalers: want to close to transport such as main roads, railway to
reduce costs and save time
Manufacturing: need to reduce costs, be close to suppliers and markets
(zoning requirements factories will be located on outskirts of cities)
Demographic of market: luxury
Clusters: food courts, shopping districts
Support services: located close by
FINANCE
Syllabus: source, cost
EVERY business has start up costs that they must be concerned about.
 How much will obtaining premises cost?
 How about inventory?
 What about staff, marketing and utilities?
 Interest due on money used to start the business
 Decision of whether to lease of buy has a large effect on these calculations (buying vs
leasing)
 Cost of goodwill – intangible asset
 What other questions are there to consider?
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.22, pg. 371
Sources of finance
 Starting a business does not require as much capital/finance as people may
believe: many start with $5,000 of less
 21% of businesses in Australia operate from a home address
 Initially business owner should continue to work part time to have a reliable
source of income or have a partner working full time for bills etc
 What are the two options of financing
for the budding entrepreneur?
2 sources of finance:DEBT AND EQUITY
EQUITY FINANCE: comes from internal sources, such as the owner’s savings
and profits reinvested in the business, or external sources such as prom
shareholders in a private company (private equity)
DEBT FINANCE: or loans.
Is provided by a number of financial institutions outside the business. Major
banks are the biggest providers of finance for SMEs. They have many offerings
for small business needs.
Investment banks provide finance for large businesses. SMEs are not in their
target market. They also provide investment advice, takeover and merger
assistance.
Government organisations have finance available as grants and low-interest
loans to businesses that have export potential or will contribute significantly to
the economy and employment
http://www.grantslink.gov.au/
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.23, pg. 372
Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.4, pg. 374
Ethical issue
Is it ethical for the owner of a small business to use
his or her personal credit card to pay for business
expenses and to purchase inputs in order to earn
frequent flyer points and personal rewards?
LEGAL
Syllabus: Legal – business name, zoning, health and
other regulations
Of the many laws and regulations that small
business owners need to comply with, some
important ones are:
– business name registration
– land zoning
– health regulations.
BUSINESS NAME
 it is a legal requirement for a business to register its business name. A
business will generally have a trading name. When the trading name
is different from the name of the owner it must be registered with
NSW Fair Trading. Business Names Act 2002 (NSW)
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Registering the business name allows any stakeholder to identify who the owners are. The
business is issued with a certificate, which must be displayed where customers can easy
see it.
 Must also apply for an ABN – Australian Business Number which
must be recorded in all transactions, letters and documents this is
obtained via the ATO
 Business owners can check whether the name they wish to use has
been taken by consulting the National Names Index on ASIC’s website.
ZONING
 Local governments have the legal power to restrict
where certain businesses can be located.
 Zoning regulations or laws create areas, where land
can only be used for particular purposes. WHY?
 The typical zones are: residential, commercial, light
industrial and heavy industrial, open spaces and
recreation
 As communities grow areas can be rezoned
Health regulations
 Local governments require businesses in their region to be registered and hold
all relevant permits and licences.
 Health regulations exist to protect consumers from diseases and food
poisoning.
 Every business in Australia is covered by occupational health and safety
legislation. In NSW it is the OH and S act 2000 (NSW)
 Many industries have specific requirements for health, such as those businesses
involved in food preparation and service – they must:
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Have a clean kitchen, free from vermin (rats and cockroaches)
Use clean cooking utensils
Prepare food in a hygienic manner
Cook and store foot at appropriate temperatures
NEED TO RENEW LICENCES ANNUALLY – PHYSICAL INSPECTION by LOCAL GOVT’s
ENVIRONMENTAL HEALTH DEPARTMENT
 When establishing a business it is the responsibility of the owner to ensure that
hte business complies with all health and safety requirements stated in govt
laws and regulations. If it does not the business could be sued for negligence if
a person’s health is affected. Business may be prevented from trading
Other regulations
There are many regulations that affect SMEs but the most well known are:
 Competition and Consumer Act 2010 (Cth) formerly the Trade Practices act
1974 (Cth) re patents and licences.
This is a federal government law that applies to nearly every aspect of the
operation of a business. It controls and influences how businesses can act in
the market when trading. The aim of the Act is to prevent businesses from
gaining an unfair advantage over competitors. Under this act all businesses
and consumers in Australia have rights and obligations including the
following:
 Products must be safe
 Businesses cannot make false claims or mislead consumers in their
advertising – e.g. Stating made in Australia when this is not true – only
make in Aus can display AusBuy logo www.ausbuy.com.au
 Goods must be priced openly. Prices cannot be fixed to prevent fair
competition. It is illegal for sellers to agree among themselves to set prices
at a high level
Act prohibits any anti-competitive and unfair business practices that take
advantage . ACCC enforces the act www.accc.gov.au
Patents
ACCC particularly involved in regulating and
price fixing are:
 Bank fees
 Electricity and gas
 Insurance
 Petrol pricing
 Postal services
 Railways
 Telecommunications
HUMAN RESOURCES
Syllabus:
Human resources:
 Skills
 Costs – wage and non-wage
Having the right staff is very important to a
business’s success. It is the employees who are the
face of the business when dealing with customers
and they perform the tasks planned by
management
Skills
 Employees must be an asset for the business
 Must be hard working, share the vision of the business and be able to
handle any change within the organisation
 Staff need appropriate experience and skills to perform the tasks
required
 Newly qualified accountants/lawyers often ‘learn’ for 1-1.5 yrs before
they are fully productive – business needs to spend much time
instructing juniors on how to complete a job
 Large businesses will have an HR department to organise complete
training and development of new as well as current staff to enhance and
improve their skills: mentor programs, tertiary study courses – all aim
to improve skills so they become more productive and a greater
asset to the business
Skills of staff
• One of the most important influences when establishing a SME is staffing.
• If a SME owner decides to hire staff, many sources are available.
• The overriding recruiting objective is to attract a pool of qualified applicants
with the most suitable skills.
• Skilled employees are more productive and create wealth for a business.
• A business will only employ someone if the return is greater than the cost
Costs
Chapter 11, Influences in establishing a small to medium enterprise, FIGURE 11.28, pg. 381
Summary
•
One of the most important influences when establishing a SME is staffing.
•
If a SME owner decides to hire staff, many sources are available.
• The overriding recruiting objective is to attract a pool of qualified
applicants with the most suitable skills.
•
Skilled employees are more productive and create wealth for a business.
•
A business will only employ someone if the return is greater than the cost.
• On-costs are payments for non-wage benefits, including long service
leave, workers’ compensation and annual leave loading.
Chapter 11, Influences in establishing a small to medium enterprise, pg. 385
Chapter 11, Influences in establishing a small to medium enterprise, TABLE 11.6, pg. 386
Summary
•
Taxation is the compulsory payment of a proportion of earnings to the government.
• Businesses are responsible for checking their obligations concerning group tax
(PAYG), fringe benefits tax, goods and services tax, company tax, capital gains tax,
stamp duty, land tax and payroll tax.
• Goods and services tax (GST) is a 10 per cent value added tax imposed on most
goods and services.
• The customer pays GST when buying goods and services, which is passed on to
the business that in turn passes it on to the Australian Taxation Office (ATO).
• GST collection and payments to the ATO are recorded on the business activity
statement (BAS), which is also the means by which a business can claim input tax
credits.
• The Australian Business Number (ABN) is a single identifying number that a
business uses when dealing with government departments and agencies.
•
Property rates is the main local government charge a business will face.
Chapter 11, Influences in establishing a small to medium enterprise, pg. 389