What you need to know

Small to medium enterprises (SMEs) make up the overwhelming majority of Australian businesses. The Australian Bureau of Statistics (ABS) commonly classifies a business with fewer than 20 employees as small and one with 20 to 199 employees as medium. Most SMEs are independently owned and operated, with the owner making most decisions and often providing most of the capital. SMEs matter because they create a large share of employment, supply larger businesses, drive innovation and give regional communities local services.

• Personal qualities: qualifications, skills, motivation, risk tolerance and entrepreneurial ability of the owner.
• Sources of information: accountants, solicitors, bank managers, industry associations, government agencies and online data such as ABS statistics.
• The business idea: a product that solves a real customer problem, a gap in the market, or a competitive advantage.
• Establishment options: start a new business (full control, high risk), buy an existing business (customers and cash flow in place, but you inherit its problems) or buy a franchise (proven system and brand, but ongoing fees and limited freedom).
• Market: target customers, competitors, location and expected demand.
• Finance: owner's equity versus debt; how much is needed to start and to survive until cash flow turns positive.
• Legal and regulatory: business name registration, an ABN, licences, zoning, tax (GST registration above the turnover threshold) and employment law.
• Human resources: the skills needed and whether staff can be found locally.

The business life cycle

Most businesses move through four stages: establishment, growth, maturity and post-maturity. The stages are not fixed in length and a business can move backwards. Sales usually rise slowly at first, climb steeply during growth, plateau at maturity and then either hold steady, decline or are renewed. The owner's challenge is to recognise which stage the business is in and to adopt the strategies suited to that stage.

In the post-maturity stage three paths are possible. A steady state business keeps sales roughly constant. A business in decline sees falling sales and may face voluntary cessation (the owner chooses to close or sell) or involuntary cessation such as bankruptcy (for individuals and partnerships) or liquidation (for companies). In voluntary administration an independent administrator is appointed to try to save a company that is insolvent or close to it. The third path, renewal, is achieved by launching new products, entering new markets or restructuring.

Check yourself

1. Under the ABS classification, how many employees does a small business have?
2. Give one advantage and one disadvantage of buying a franchise rather than starting a new business.
3. Which section of a business plan would contain a cash flow forecast?
4. A product sells for $30 and has variable costs of $18. Fixed costs are $24,000. How many units must be sold to break even?
5. Name the four stages of the business life cycle in order.
6. What is the difference between voluntary and involuntary cessation?

Answers: 1. Fewer than 20 employees. 2. Advantage: a proven system, established brand and support from the franchisor; disadvantage: ongoing fees and limited freedom to make decisions. 3. The financial plan. 4. Contribution margin = 30 − 18 = $12; 24,000 ÷ 12 = 2,000 units. 5. Establishment, growth, maturity, post-maturity. 6. Voluntary cessation is the owner's choice to close or sell; involuntary cessation is forced on the business, usually because it cannot pay its debts (bankruptcy or liquidation).