What are the three pillars that ensure small business success?

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What does small business success mean to you?

Small business success means different things to different people. To some small business owners, staying in business and drawing a regular income equates to success. For others, if they maintain a certain lifestyle and achieve a particular way of life, they consider themselves successful. There are also those who consider fast business growth as the measure of their success. However, in my opinion the universal measure of success in business boils down to one single question: are you getting rich?

But what about profitability and cash flow?

More often than not business success is judged by measuring profitability. The assumption is made that if a business is profitable, cash flow and wealth creation automatically follow. But when interest rates are high and credit is tight, the focus shifts away from profitability and we then hear that ‘cash is king’.

Many business advisors and commentators tend to focus on profitability and cash flow and compare the difference between the two. Quite correctly they highlight the timing difference between income and incurred expenses as opposed to actual receipts and payments. A simple Google search will reveal hundreds, if not thousands, of articles about profitability and cash flow and the fact that you can be profitable and have a negative cash flow and vice versa.

The three pillars defined

We find that in most cases, focusing on profitability or cash flow alone fails to address long term business success. So, our approach is a more comprehensive. We argue business success depends on three key elements:

  1. Strong profitability
  2. Positive cash flow
  3. Growth in wealth

We call these three elements ‘the three pillars of success’. Through our extensive experience, any small business that gets these three elements working will be very successful.

So, let’s remind ourselves what profitability, cash flow and wealth mean:

  • Profit = Income – Expenses
  • Cash Flow = (Receipts – Payments)
  • Wealth = (Assets – Liabilities)

The challenge for any small business owner is to have all three elements working in harmony and moving in the right direction.

So where to from here?

Obviously, every small business owner or manager wants to be successful. Over the past 30 years we have had the opportunity to study hundreds of SMEs and we have had the pleasure to develop recommendations to improve their performance and grow their assets. In doing so, we have found that the process becomes repetitive as most businesses share similar problems and concerns. Business principles are also universal.

Using our extensive experience, we have systematised our approach which is now being offered to SMEs as ‘The MACHUS Small Business Boost Program’. The program includes:

  • Detailed examination of your small business
  • Identification of areas that can be improved (for example, cost cutting, margin improvement, productivity increases, sales extensions, value adding)
  • Detailed recommendations including specific strategies for each pillar of success and timelines for implementation
  • Development of reporting tools specifically designed to your requirements (these usually include KPI and Cash Flow reports)
  • Periodic performance reviews and application of continuous improvement principles to the Business Boost Program

A final word

The application of our program takes time and persistence, but the greatest motivator for you will be seeing gradual and consistent improvements, or in other words, greater small business success. In fact, it’s our greatest motivator too. We see this program as an ongoing partnership between our clients and ourselves. We look forward to helping you on a path to achieving small business success too.

Do small businesses in Australia really get a fair go?

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The small business landscape in Australia

The Commonwealth Department of Innovation Industry, Science and Research regularly publishes statistics about Australian small businesses[1]. Some of the data makes interesting reading. For instance, did you know:

  • Australia currently has in excess of 2 million small to medium enterprises (SMEs)[2]
  • SMEs, in total, represent more than 99.0% of all trading businesses in Australia
  • SMEs provide in excess of 70.0% of total employment
  • SMEs contribute 57% of the total Australian economy

The importance of small businesses is often underestimated

The above numbers are staggering, but they don’t tell the full story of the important of SMEs. For example, SMEs include by far the broadest possible range of skills and talent of any sector. SMEs also act as the greatest safety release valve in our economy. Most importantly, no other sector provides opportunity and engages such a disparate community, many of whom do not fit conventional norms and who would be considered unfit for employment by government or large corporations[3].

Does government support SMEs in Australia?

Just imagine what would happen if SMEs stopped operating. It is because of this that federal, state and even local politicians always highlight how much they care and help small business. But the reality is actually quite different.

Over the past 20 to 30 years SMEs have been progressively over-loaded with ever increasing compliance and financial burdens which are disproportionate to their size, abilities and resources. Just consider the compliance and cost to a small business of the following legislation implemented during the past 30 years:

  • 1985 Capital Gains Tax (new impost)
  • 1986 Fringe Benefit Tax (new impost)
  • 1992 Superannuation (new impost)
  • 1993 First Federal “unfair dismissal” legislation
  • 2000 GST (new impost eliminating Sales Tax)
  • 2009 Fair Work Australia Act provisions
  • 2011 Latest safety legislation; the most recent changes make company directors personally responsible for all safety matters in the workplace
  • Payroll Tax (state legislations). The most insidious tax, punishing employers for employing people

Add to the above, Superannuation increasing from 9.0% to 12.0%, the likely Carbon Tax or similar, administrative requirements, the new tax amendments making directors personally responsible for PAYG tax and Superannuation. The list goes on. In addition, many SMEs are subject to industry specific compliance requirements. Ask yourselves, who is paying for all this and do we really get any compensation for our enormous investment?

The federal government’s minister responsible for small business is Michaelia Cash. She replaced Brendan O’Connor[4], who rather appropriately was also Minister for Homelessness. It is ironic that neither of them have ever worked for, managed or owned an SME. The current Shadow Minister for Small Business is Madeleine King, also a lawyer. These people don’t understand or much care for small businesses. In fact, the portfolio does not qualify for a cabinet position and it’s usually grouped with a range of other functions unrelated to small business.

A final word

Next time politicians of any persuasion start talking about the “Aussie Fair Go”, just remember that aren’t referring to Australian small businesses. So as a small business, why not make yourself heard and contact your local political representatives to remind them that SMEs actually do count and they are a backbone of the economy.

 

 

[1]Brendan O’Connor was Minister for Housing, Homelessness and Small Business.

[2]Source, “Key Statistics Australian Small Business”, Australian Government Department of Innovation Industry, Science and Research.

[3]SME – Small and Medium Enterprise

[4]Unfit in this context does not mean that they lack talent or cannot work. It means that they are unemployable because of age, lack of specific formal skills, personality traits, independent character, health concerns, etc.

Have you got a great business idea that could make you rich?

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I’m sure you have heard the statistics. In Australia, more than 60% of small businesses fail within the first three years. There are various reasons cited for this including cash flow issues, trading losses, inadequate training and lack of capital. However, I believe most businesses fail because the owners are so excited about their idea that they forget to do their homework and properly plan.

The MACHUS Solutions Business Pre-Launch Checklist

I have put together a MACHUS Solutions Business Pre-Launch Checklist to dramatically improve your chances of success and to ensure your business is not another statistic. The checklist is by no means exhaustive, but it’s a great starting point to ensure you adequately plan and think beyond your initial great idea.

If you are in doubt about whether your business idea will work, undertake more research and even redesign your business model. Above all, you need to make absolutely certain your business idea will attract enough customers because without customers, you’ll have no business.

  1. Research
    • Do I have a business model?
    • Do I have a clearly defined product or service?
    • Do I know who my customers are?
    • Do I have reliable suppliers and service providers?
    • Do I know what my point of difference is?
    • Is my point of difference sustainable?
  2. Planning
    • Do I have a marketing plan?
    • Do I have budgets and cash flow projections?
    • Do I have enough information to complete a business plan?
  3. Name and Structure
    • Do I know how the business will be structured?
    • Do I have a registered name for my business?
    • Have I secured a domain name?
  4. Resources
    • Do I know how I will fund the business?
    • Do I know what outside skills I need to engage?
    • Do I need to secure plant and equipment?
    • Do I plan to secure or develop intellectual property?
    • Do I know how to protect intellectual property?
    • Have I secured a shop front?
    • Have I covered all insurance requirements?
    • Do I need a website?
  5. Compliance
    • Permits and licenses
    • Australian Taxation Office (PAYG & GST)
    • Occupational Health and Safety (OH&S)
    • Superannuation
    • Fair Work Australia
    • Other industry specific requirements
  6. Reporting
    • Have I resolved bookkeeping needs?
    • Do I know how I will monitor sales performance?
  7. Business Advice
    • Do I have a business coach, advisor or mentor to assist me?

We have over 30 years business consulting experience and we have worked with dozens new businesses in nearly every industry. If you need help with your great business idea, please contact us. It could be the most important call you will ever make.

What’s the definition of a small business in Australia?

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MACHUS Solutions’ CEO, Mac Radomyski, has over 30 years’ experience working with small business clients, ranging from sole traders to multi-site operations, in almost every industry.

What makes a small business?

Formally, Mac has always used the ATO’s definition as his measure of whether a company is a small business. That is, a small business is one which has less than 15 employees and turns over up to $2.0M annually.

However, informally, Mac believes a small business can be classified by the way in which it is managed. Small business owners, for example, generally micromanage activities. Much of the management is based on the owner’s memory, instincts and experience, rather than via formal procedures such as cash flow management, prescribed policies, management structures, human resources, IT and recruitment. Business risks are also often ignored or underestimated.

In addition, small businesses tend to focus on survival and generating and meeting orders rather than on long term planning. When compared to larger organisations, fixed costs tend to be lower so small businesses can be more flexible and tolerant to sales fluctuations.

A universal definition of a small business?

Mac believes there most definitely should be a universal definition of a small business. Firstly, a standard definition would mean they are treated uniformly under State and Federal employment, taxation and other relevant legislation. Secondly, and as outlined above, small businesses have different priorities and requirements to those of larger businesses so a universal definition would better assist in addressing these.

Does your franchisor provide marketing support?

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Australia’s franchise landscape

Franchising is a rapidly growing aspect of Australia’s small business sector. According to the Franchise Council of Australia’s latest “Franchising Australia” survey, there are 1,120 business format franchisors in Australia with an estimated 79,000 individual franchisees in operation employing over 470,000 people.

For a small investor looking at starting a business, franchising can offer many benefits. This is particularly the case if the franchise brand is a successful one, there are genuine opportunities for growth and healthy capital gains will be experienced after a few years of operation.

Franchisor marketing support

If you do some research, you will find that the most successful franchises are those where the franchisor takes responsibility for undertaking any required marketing activities. In other words, the franchisor promotes the business directly to consumers and end-users to increase brand awareness, drive consumer traffic and also generate leads for the individual franchisees. In addition, the franchisor will equip the franchisees with any required sales tools including point of sale (POS), brochures and promotional items.

The franchisee, on the other hand, ensures the product or service is delivered according to the franchise rules. Typically, food franchises work like this. However, many other market sectors use the same formula, for example Harvey Norman and the Bank of Queensland.

So why is this detail so important?

Like any new small business, new franchisees probably lack the funds and the skills required to promote their business. One of the great benefits of franchising stems from the ability of the franchisor to harness economies of scale in relation to marketing costs, especially in relation to large scale campaigns, printing and digital marketing activities.

So, if you want to buy a franchise, particularly if it’s your first business venture, stay away from those franchises that expect you to take responsibility for the marketing. It would be more beneficial to start your own independent business and save the royalties and marketing levies you’d otherwise be paying to a franchisor.

The importance of cash flow projections

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Having worked with small to medium-sized enterprises (SMEs) for over 30 years, most recently as CEO of MACHUS Solutions, I have been privileged to provide advice to clients in almost every industry. But, by working with all kinds of SMEs, ranging from sole traders to multi-site operations, I have unfortunately witnessed a lot of business failures. These failures have generally always come down to one thing, poor cash flows. The worst part, is that in most cases managers didn’t know of shortages ahead.

Why are cash flow projections so important?

Simply put, they show a business’s liquidity for the period covered by the projections. Cash flow is the lifeblood of every business, yet it is one of the key areas that is often neglected because cash flow projections are something that most new and existing business owners believe to be unnecessary or complicated.

I’ve seen it all too often. A business has an accounting system that produces profit and loss statements and balance sheets every month. However, despite these reports showing a very healthy picture of the business and its financial performance, it is unable to manage its cash position. In other words, it struggles to generate cash to meet its debt obligations and to fund its operating expenses.

What can a business do to improve its cash flow and liquidity?

I have a great piece of advice for SMEs. Whoever is responsible for the financial control of the business, even if the business is very small, should make sure they generate cash flow projections for at least three months ahead. It is much easier to deal with a cash short fall if you know months in advance that it will happen. There’s very little a business can do if you discover there is a shortage when you are trying to pay your wages or creditors.

I believe business surprises should always be avoided. So, make it predictable with longer cash flow projections.