The Hindu Business Line : Being small and succeeding

When I asked him what he wished he had known before he went into business, his responses seem astonishing for those of us familiar with business issues. (Many people who go into small business have no basic business training).

It's possible not to make a profit: He had bought the business from a mate who seemed to be making a living from it, so he assumed that profits would be made as a matter of course.

He knew little about budgets and nothing about business plans. What he quickly found out was that it is quite easy not to make a profit. With perishables, buying too much stock not only had a cash flow effect but would immediately result in a negative gross profit margin.

Not all the takings belong to you: Having a pocket full of cash takings was difficult for a young guy about town to resist. The fact that nearly all of it belonged to his suppliers, staff and landlord was, amazingly, not immediately apparent to him. If he had even basic budgets he would have had an idea how much was rightfully his.

Owning a business does not automatically entitle you to own a Porsche:

He actually said that he's glad he didn't know this — he loved the Porsche. (The business just couldn't afford it).

You can go broke making a profit: He didn't, but he could have — nightclubs and Porsches can have that effect. Our entrepreneur was lucky to be in retail — with up-front cash from customers and creditors who allowed 60 or 90-day terms.

Others are not so fortunate — get a business with the trading terms around the other way and the doors can close even before the profits have turned into cash.

How to approach a bank: Never having had more than a savings and cheque account, he didn't know how to approach a bank to set up the facilities he needed, nor how to tell them when cash became tight.

He only managed to get an overdraft by issuing cheques for more than his available funds, drawing the bank's attention to his need for a facility. He was lucky — this approach does not usually work.

How to sell the business for a gain: He really did not know whether he had even paid the right price for it — some irrelevant "rule of thumb" had been floated by the vendor which, like most rules of thumb, had no real relationship to profit.

He did know that increasing sales should increase the value of the business but not how other factors, particularly risk factors like reliance on key skilled staff, could affect value.

Work didn't finish at the end of the business day: Most people in small business are horrified by the amount of paperwork required to be done — made vastly more cumbersome by sales tax. My entrepreneur was appalled to find his social life severely interrupted by having to prepare invoices and debtors statements every night.

He knew he had to do this because the suppliers and landlord had indicated the limits of their patience. He should also have been doing a lot of other things, like bank reconciliations, but ignorance can be bliss — for a while.

Professional advice can be useful: He thought an accountant was just a necessary evil — something you needed when the finance company wanted some assurance you could afford the payments on the Porsche. (How he found one to do that amazes me). If he had known about business plans and budgets, then perhaps his entrepreneurial experience might have been far more rewarding.

If he had seen a solicitor when entering into the lease for the business premises perhaps he would have been more aware of the renewal provisions and not missed picking up the option to extend.

Marrying a CA can save your business: If that's a bit extreme, then at least try to consult one!

(Edited extracts from Charter, a journal of The Institute of Chartered Accountants in Australia. www.icaa.org.au/charter.)

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