PRELIMINARY TOPIC 3: BUSINESS PLANNING Small to Medium Business Enterprises DEFINITION

● Non-subsidiary ● Independent firms ● Roughly employ 100 (manufacturing) or 20 (non-manufacturing) employees

ROLE

● Economic development of a country ● Production ● Employment generation ● Contribution to exports ● Facilitating equitable distribution of income

ECONOMIC CONTRIBUTION

● up to 45% of total employment ● 33% of GDP. ● Including informal businesses → more than half of employment + GDP irrespective of income

levels SUCCESS AND FAILURE Success

● Positive, committed, patient and persistent habits/traits

● Strategic business plan

● Structured + functional organisation

● Operational support systems

● Optimal capital Failure

● Poor management

● Insufficient capital

● Lack of planning

● No social media presence

● No website

Influences In Establishing A Small to Medium Enterprise

PERSONAL QUALITIES Skills/Motivation:

- Passion - Questioning/Thinking Critically - Overcome setbacks/failure/doubt - Form/lead a team - Will take risks

Qualifications:

- Business school/university - Persuading/deal making - Practice - Intern/learn from an established business - Expect failure → grow from experience

SOURCES OF ADVICE

● Trade Associations

● Accountants - advice on all financial management issues + taxation

● Bank Managers - info + advice on financial services, sources of finance etc.

● Solicitors - info about business formation, structures, registration etc.

● TAFE

● Federal, State + Local Government - Federal Government Agencies

- www.business.gov.au: access to departments w/ advice - Info on exporting, fair trading, taxation, research, development - Technological advice: e-business guide

- State Government Agencies

- NSW Dept. State + Regional Development: starting/buying a business, managing, exporting, current workplace issues etc. - Business Enterprise Centres: how to establish, sample business plans + methods, identifying opportunities, easily accessed etc.

- Local Government Agencies - Local Councils: land zoning advice, subsidised land assistance + consider development applications

SOURCES FOR NEW IDEAS

● Inventions ● Innovations ● Changes in law

● Changing social attitudes ● Cultural change ● Political change

● Collapse of competitor ● Government policy changes

● Technological change

THE BUSINESS IDEA PROCESS Idea formulated → 1st assessment of idea → undertake research → reevaluate idea → problems identified → alternative solutions identified → understand risk → make decisions → START COMPETITION

● Opportunity depends on competition level ● Entrepreneur decides what market to enter (broad/specialised) ● Identify level of competition and main competitors ● Achieving competitiveness - cost of production (low producing cost = low price), differentiation

of product/service (unique/different product) ● Strong enough business = can prevent others from entering ● Benefits of competition: forces business to maintain quality service, identifies

strengths/weaknesses, encourages creative/innovative thinking ESTABLISHMENT OPTIONS

1. Starting A New Business 2. Entering A Franchise Agreement 3. Purchasing An Existing Business

STARTING A NEW BUSINESS

● Most challenging/most risky ● Positive when:

- In expanding market with high consumer demand - Existing business providing inefficient service - Have new product others don’t have

ADVANTAGES DISADVANTAGES

- Owner makes every decision - Less expensive to establish - Select own name - No goodwill - Can recruit suitable staff - Set up procedures + policies

- Harder to obtain debt finance (no past records

- Take long time to earn profit/customers - Need time/energy to recruit/train staff - No established network/suppliers - No existing records of performance

ENTERING A FRANCHISE AGREEMENT ● Franchise pays for right to use established business’ name + business formula ● Buying a tried + proven business idea developed by entrepreneur

ADVANTAGES DISADVANTAGES

- Reduced failure risk - Expert backing/advice - Franchisor researches + develops - Suppliers + input - Assistance with start-up - Procedures system exists

- Cost more to establish - Ongoing fees + charges to franchisor - Less independence - Competition between franchises - Poor service from one affects another - Franchisor can misrepresent

BUYING AN EXISTING BUSINESS

● Purchase business + everything associated with it - E.g. stock, equipment, premises, established customer base, reputation

ADVANTAGES DISADVANTAGES

- Can be purchased at turnkey - Loyal customers already - Advice/assistance from former owners - Passed establishment phase - Easier to obtain finance - Established suppliers

- Higher cost owing to goodwill + assets - Insufficient systems hard to change - Could be in decline phase - Non-obvious problems - Restrictions in size/layout - Past success from past owner

Turnkey: all system procedures, policies, operations in place and no changes are needed for improvement MARKET INFLUENCES

1. Goods/Services 2. Price 3. Location

GOODS/SERVICES

● What business sells, target market, size of market + location of target groups ● Considerations: level of demand, competitor’s products, cost of providing products, stage in

product life cycle, product details, legal aspects, target market PRICE

● Determines price goods/services are provided at ● Determining Factors: costs + markup, competitor’s pricing, recommended retail price

LOCATION

● Different type suited to different location ● Determining Factors: rent/buy (cost), size of required space, supplier proximity, available utilities

SOURCES OF FINANCE 1. Debt Finance: money obtained through loans

- Banks - Credit unions - Finance companies

2. Equity Finance: funds from owner - Or from partner in business

COST OF FINANCE

● Type of Finance ● The Source - debt = interest, equity = ownership ● The Term

LEGAL CONSIDERATIONS

1. Business Name 2. Zoning 3. Health + Other Regulations

BUSINESS NAME

● Cannot be already registered ● Not similar to already established name ● Not misleading/offensive ● Sole Trader - doesn’t need registered name ● Protects reputation

ZONING

● Controlled by local government ● Ensures activities of businesses + residential are kept separate ● E.g. businesses can’t be placed in residential areas

HEALTH + OTHER REGULATIONS

● Requirements/standards businesses must meet to receive operating license & ensure health + safety of consumers.

● E.g. temperature for food storage, kitchen layout, employee clothing, correct handling ● Assessed by health inspector

Patents: law to protect intellectual property of an entrepreneur

- Applying for an innovation patent: determine if you have one, search, apply, publication, examination, certification

Trademark: a symbol/word(s) legally registered or established by use as representing a company or product.

HUMAN RESOURCES EMPLOYEE SKILLS

● More productive + create more wealth

● Provide training or recruit those with training

EMPLOYEE COSTS

- Base salary - Superannuation - Annual leave - Public holidays - Sick leave - Payroll tax

Superannuation: employers make financial contribution for when employees retire. TAXATION FEDERAL TAX

● Company Income Tax ● Group Tax

● Fringe Benefits Tax ● Goods and Services Tax (GST)

STATE TAX

● Stamp Duty ● Land Tax

● Payroll Tax

LOCAL RATES + CHARGES

● Water and Sewage ● Development + Building Approvement Fees

● Waste Management

The Business Planning Process ROLE OF THE BUSINESS PLAN

● Sets out desired goals + direction of business SOURCES OF PLANNING IDEAS SITUATIONAL (S.W.O.T.) ANALYSIS

VISION/GOALS/OBJECTIVES VISION

Vision Statement: vs. - Aspire to be in future?

E.g. To be the region’s most respected architectural design company.

Mission Statement: - Why company exists?

E.g. To empower every person and organisation on the planet.

BUSINESS GOALS

● Overall accomplishments the business plans to achieve in future ● Set by upper management ● Aligned with business’s ‘vision’ ● Financial Goals e.g. profit, market share, growth, share price ● Social Goals e.g. community service, employment provision, ecological sustainability ● Specific, Measurable (quality), Achievable for all, Realistic, Timely

LONG-TERM GROWTH

● Ability of a business to continually expand ● Ensures business is sustainable in the future ● Depends on ability to develop and use asset structure to increase sales/profit

ORGANISING RESOURCES OPERATIONS

● Production of a good or service ● Designs and makes changes to products ● ‘What customer wants’ ● Detailed description of good/service ● Manufacturing - receiving inputs (raw materials), transforming into a product

MARKETING

● Plans for how business entices customers ● Understand target market ● Detailing on packaging, brand, position, size, colour, shape, image etc.

HUMAN RESOURCES

● No. of employees required to produce products/skills employees need ● Ensure they have enough to achieve strategic goals ● Responsibilities:

- Recruiting + selection - Safe + healthy work environment - Measure + evaluate employee performance - Train workers - Establish reward system (for employees)

FORECASTING TOTAL REVENUE

Total Revenue: total amount received from sales of good/service

Price x Quantity = Total Revenue

TOTAL COST Fixed Costs: do not vary Variable Costs: depend on number of goods or services produced Total Cost: (of producing goods) sum of fixed + variable costs

Fixed Costs + Variable Costs = Total Cost

BREAK-EVEN ANALYSIS ● Determines level of sales needed to cover production costs

Quantity = Total Fixed Costs ----------------------------------------------- Unit Price - Variable Costs per Unit CASH FLOW PROJECTIONS

● Shows expected changes to cash position from operating, investing and financial activities ● Clear indication of capital investment requirements + evidence of good credit risk ● Cash transactions = sales, debt collection, expected payments ● Positive = more cash coming in than leaving

MONITORING AND EVALUATIONS

Monitoring: measuring actual performance against planned performance

Performance Standard: forecast level of performance to compare against

Evaluation: assessing whether business has achieved goals SALES

● Comparing budgeted sales against actual sales BUDGETS

● Financial plan for the future ● How business will use resources to reach goals

PROFITS

● Maximisation ● Source of finance ● Performance indicator

TAKING CORRECTIVE ACTION

● When situation cannot continue + modification is required Modifying: changing existing plans using updated information for future plans

Critical Issues in Business Success and Failure IMPORTANCE OF A BUSINESS PLAN

● Statement of business goals ● Plans for achieving goals ● Control standards (measuring performance)

MANAGEMENT (STAFFING AND TEAMS)

● Manager - solve problems ● Ensure employees are satisfied + motivated ● Teams make informed decisions without need for supervision ● Attitudes of commitment ● Positive business culture ● Monitor internal and external environments ● Allocate resources ● Monitor performance

Skills Audit: establishes current skill levels and future skill requirements TREND ANALYSIS

● Investigating changes over time + looking for patterns ● Help forecast potential sales, total revenue, operating costs, gross + net profits

IDENTIFYING AND SUSTAINING COMPETITIVE ADVANTAGE Competitive Advantage: strategies used by business to get edge over competitors

Price/Cost Strategy - Lowest production costs - Reduced product price - Efficient operations - Low cost labour - Technology

Differentiation Strategy - Offer something different

● Ensuring Long Term Success

- Research and development - Patents and copyrights - Exclusive contracts with suppliers for preference - Lobbying government to limit foreign competition (restrict imports)

● Sustaining - Constant action - Dynamic management - High quality - Dependable service

AVOIDING OVEREXTENSION OF FINANCE (+ OTHER RESOURCES) ● Can overextend:

- Using hire purchases - Purchasing excess stock - Employing too many staff - Over use - Under-maintenance

Leasing: long term source of borrowing

● Ways to avoid: - Business planning - No overdependence on debt finance - Long term financial planning

USING TECHNOLOGY

● Reduce communication/time delays ● Improved distance communication ● Robots, machinery, equipment ● Faster production times ● Reduce overall costs ● E.g. EFTPOS, faxes, transport, machinery

E-business: (electronic business) using internet to conduct business E-commerce: buying/selling goods on internet ECONOMIC CONDITIONS

● Experiences booms and recessions ● Good =

- High levels of consumer spending (increased profit) - Low interest rates (borrowing cost is cheap) - Falling unemployment (increase workforce size) - Increased production (increased sales)