We are an optimistic nation: even as the Australian Bureau of Statistics reports that we lost 30,000 small businesses between 2007 and 2010, we also know that around 300,000 businesses will start in Australia each year.
At Yellow Brick Road we have a small business advisory division, so we get a lot of people enquiring about opening a business. Although I have had a rewarding life in business, the first thing I tell prospective business owners is that they should think about the pitfalls. Success is easy to see: it fills our imaginations. But there are pitfalls that are very real even if you can’t see them.
The first pitfall is the optimism problem: new business owners typically think it will cost less money and less time to get the company going than it actually does. To avoid this trap, I suggest you start with a visit to an expert adviser and develop a business plan. This may not sound romantic, but it is the cornerstone of all businesses, and it’s also the point at which an objective outsider starts to ask you, ‘what about this?’ ‘What about that?’ When you write a business plan with an adviser, you picture the worst case scenario, and by planning for it, you can beat it.
Second is the Hail Mary problem. This is a classic pitfall where the owner gambles all the start-up capital on the upside and doesn’t protect against the downside. I advise people to get an insurance broker before they open their doors and get themselves covered for the business insurances they will need. Business insurance is complex and has massive variety – you must have a broker to ensure you get the coverage tailored to your business. The third pitfall is what I call “Jumping the Gun”: many business starters take their start-up capital and spend it on a flash car and a nice office.
Why? This is especially the case with office leases: you could be stuck with a five-year lease long after you’ve closed your business or relocated in a different suburb or city. If you need an office, start with a short term lease, or even a sub-lease. The last pitfall is Thinking Small. Many new business owners are buying themselves a job, but they don’t account for all the unpaid hours they spend administering this salary-replacement strategy.
They burn out and the returns are not good enough to justify it. I advise that business starters include a section in their business plan that states what returns they want on the money they’re putting in, and what their risk capital should be earning. Thinking Small is often a false economy: hiring staff allows you to sell your expertise, rather than doing administration.