Going into business
The information provided here is not intended to be a substitute for professional advice. However, the more you can do by yourself or the more informed you are when seeking professional advice the more straightforward and (hopefully) cheaper the process will be.
Remember that you will be spending a large amount of time in whatever it is you do.
The prospect of being your own boss and making your own money may seem enough for many people. However, there is enough evidence to show that for start-up businesses to succeed the owners need to be totally dedicated. This only really comes if what you are doing is close to your heart.
Before buying a business or a franchise you need to be honest with yourself about how ‘into it’ you really are. If you have doubts then another opportunity may be a better option for you to pursue.
The field of dreams!
Another reason why businesses fail is the ‘field of dreams’ syndrome – “if you build it they will come!” Wrong!
Do not commit yourself to any business idea before finding out whether there is a market for your product or service. Also, find out how strong the competition is. These two bits of information will help you work out if there is a real opportunity. An idea itself is not enough.
If I fail to plan, I plan to fail!
There is a better chance of things happening if they are part of a plan rather than some vague idea.
Writing a business plan doesn’t need to be a 100 page tome. What is important is the thought that has gone into it.
As a minimum, try to address the following questions or issues:
- What is the purpose of the business?
- What are the business objectives e.g., financial, scale, market share, do you just want to be extremely wealthy or create balance with other life goals?
- Who are the customers?
- What is the competition? Think widely here – if you are selling firewood then home insulation is a competitor!
- How could the business fail? A bank or an investor will undoubtedly expect to see a detailed projected cash flow included before advancing any credit facility, loans and or funding.
What if I am buying an existing business?
In business you are looking for a return on your investment and an income. Before buying a Business or buying into a franchise it is vitally important to satisfy yourself that what you are purchasing will enable you to meet your financial targets. This is called ‘due diligence’.
There are four components to this:
- Reviewing the current ownership. What are any liabilities that may pass to a new owner?
- Reviewing past performance. Going through the books is a good job for your accountant.
- Ensuring plant, stock and equipment is accurately described, fit for purpose and valued correctly. If you don’t have the right or complete skills get someone, preferably independent, who does.
- Goodwill. This potentially can be the trickiest. Goodwill is the ‘intangible’ value associated with, - e.g., a business name, brand and or customer base - and may have been part of your initial attraction to the business. Regardless, if you can talk to customers and suppliers you may gain some feeling for how well or accurately this is valued.
Should I seek the assistance of professional advisers?
There are a range of professional advisors who can give you comprehensive assistance in many areas. This includes general accounting, tax, legal, human resources, information technology, marketing, planning and compliance. Start by identifying the areas that you may need assistance in.
Getting a second opinion before committing large sums of money is a very prudent exercise. The benefit of good and activity-specific professional assistance will generally outweigh the cost of relying on yourself in an area you may know little about.
Finding someone who can act in a business mentors role to you over the early days is also a great idea. Such mentors typically come from a diverse range of business cultures and fields and know first-hand what it feels like to struggle, take risks and survive.
What legal form should my business take?
It’s possible to do business in New Zealand under typically one of four basic types of business structure - each offering varying degrees of control and responsibility:
- Sole traders
If you’re a sole trader, your business is built around you. The entire operation relies on you, but you can still employ others to help you. You’re 100% responsible for your business’s liabilities and its debts, but you also retain full control of the business and its profits.
Many small business owners start out as sole traders because they are not required to spend money following any formal or legal processes to establish their business, unlike companies. This is because sole traders and their businesses are considered to be the same legal entity. You even pay tax through your personal Inland Revenue (IRD) number.
A partnership is when two or more people or entities join together to pool their assets and share the profits and liabilities in a business. They often bring different skills to the table and varying resources, with the division of profits and liabilities – in addition to individual roles and responsibilities – outlined in a partnership agreement.
You are still taxed as an individual on your income from the partnership. However, while you are liable for your own debts, you can also be liable for business debts incurred by your partners if they become insolvent.
It is possible for some partners to achieve limited liability through the use of a limited partnership.
Companies are separate legal entities to their shareholders. This provides shareholders with limited liability from any of the business’s debts beyond the value of their shares in the company (this is what Limited or Ltd stands for in a company name). However, if a shareholder is involved in the running of the business (as a director, for example), and he or she is found to have traded recklessly, fraudulently or not in the company’s best interests, they can still be made liable. Most financial lenders will also only give a business loan in exchange for a personal guarantee overriding limited liability.
Shareholder income is taxed at a different rate to the company itself. All companies have to declare their director and shareholder details by registering for incorporation with the New Zealand Companies Office.
Trusts are particularly useful for asset protection and estate planning, and so are commonly used for owning private and investment assets rather than for operating businesses. Which to choose should be weighed by the expected scale of your planed business.
How do I form a company?
An accountant can do this for you – for a charge. If you feel confident on the internet visit the New Zealand Companies Office website. It will step you through amongst other things registering your company name, registering your company and filing annual returns.
The Companies Office administers the New Zealand Registrar of Companies and is responsible for the approval and reservation of company names. This is the first step to incorporating your company. If you wish to change the name of your company, you also need to apply to reserve the new company name. Begin by checking that your name is capable of being reserved - the name you choose cannot: be identical or almost identical to another company name; be offensive or contain certain words that are restricted or protected by other legislation.
What are the tax obligations and registrations for new businesses?
When you start a business, you need to make sure you meet all your tax obligations by keeping the right records and registering for taxes that reflect your business activity. If you don’t, you might not only fail to pay the correct amount of tax and incur penalties, you might also be unable to claim the deductions and credits your business is entitled to.
Are you in business?
If you charge others for providing goods or services and you do this on a regular basis to try to make a profit, then you are very likely in business. Before registering your business with Inland Revenue you need to decide on a business structure. There are generally the four choices: Sole trader; Partnership (including limited partnership), Company (including look through companies); and Trust.
Each has its respective pros and cons depending on the size of the business activity you run and your ambitions for your business. A company is the most common business structure largely because it is easily understood and it offers limited liability from being responsible for the business’s debts.
When you register with Inland Revenue by applying for an IRD number you’ll automatically be given the standard balance date of March 31, which means that your accounting (or financial) year begins on April 1 and ends on March 31 (you can however apply to use a different balance date). The vast majority of SMEs in New Zealand have March balance dates. If you’re a sole trader, you use your own individual IRD number because you’re not considered to be a separate legal entity to your business.
If a company structure is chosen when you register with the Companies Office, you can also apply for an IRD number for your company at the same time. If you run a company, you use the company’s IRD number to pay business income tax at the company rate and your own individual IRD number to pay income tax on the profits you receive from the company. This is because companies are considered separate legal entities to their shareholders.
A separate IRD number is also needed if you run your business through a trust.
When do I need to register as an employer?
You must register as an employer with Inland Revenue when you start employing people. When you do, you’ll also be automatically registered as an employer with the Accident Compensation Corporation (ACC).
Before you register, determine whether the people working in your business should be classed as employees or self-employed contractors because they’re taxed differently.
After you register you’ll need to start making PAYE deductions (as well as possible other deductions for KiwiSaver, student loans, etc.), pay employer levies and premiums to ACC, and pay other taxes such as fringe benefit tax if they’re applicable.
What are my responsibilities as an employer?
When you become an employer, you need to be aware of employment rights in two key areas - the minimum pay and conditions you must provide your employees and the way you must treat your employees at work. Check the Minimum employment rights and obligations guide and Pay and the minimum wage guide both published by the Ministry of Business, Innovation & Employment I Labour. If your business operates in catering, cleaning, caretaking, laundry and orderly work, or a similar field, you may also have to provide additional rights to your employees.
Regardless of the sector you employ in, you can never ask potential employees to agree to working terms that are anything less than the minimum rights afforded to them under New Zealand law. There are financial penalties for not complying with employment laws of up to $10,000 for individuals and $20,000 for companies. An employer may also be fined or prosecuted for not complying with workplace health and safety laws.
Health and safety standards in the workplace are set by laws such as the Health and Safety in Employment Act (1992). In particular, they focus on:
- Providing safe working environments, proper training, supervision and equipment.
- Taking reasonable care to keep yourself safe and avoid causing harm to others when working.
- The employee’s right to refuse work likely to cause them serious harm.
You should get to know your obligations by reviewing the health and safety laws and regulations summaries provided by the Ministry of Business, Innovation & Employment I Labour.
Every employee must have a written employment agreement.
They can be individual or collective (i.e., union negotiated) agreements. They must include a certain set of mandatory provisions and clauses. Use the Ministry of Business, Innovation & Employment I Labour‘s Employment agreement builder to make sure you include these in your contracts. There are a number of minimum employment conditions you must adhere to regardless of whether they’re stated in writing in an employment agreement. Employment law also provides a framework for the process of negotiating additional entitlements.
Without a doubt it is best to spend time carefully researching the responsibilities placed upon you the business owner as an employer. Some suggested places to reference that will provide you with easy to read guides, publications and information links are:
- Ministry of Business, Innovation & Employment I Labour for Employment Relations, Health and Safety and Immigration.
- Inland Revenue for Employing staff.
- ACC Self-employed and Small, medium and large business
- New Zealand Legislation for the governing Acts of Parliament and Bills.
Do I need to register for Goods and services tax (GST)?
GST is a value-added tax (currently set at 15%) that is added to the price of most goods and services bought and sold in New Zealand.
If your business is GST-registered, it collects GST for the Government on the goods and services it sells and claims GST back on all the goods and services it buys from other GST-registered suppliers.
You don’t have to register for GST until your business has reached, or you expect it to reach, a turnover of $60,000 a year. A good way of measuring this is to look at your average monthly turnover – if it is (or is expected to be) $5,000 or more, you should register.
However, if you charge GST you must register regardless of your turnover (e.g., taxi drivers).
Some new small businesses register for GST regardless of whether they expect to turnover $5,000 a month. This is because they can claim GST back on the goods and services they buy – including their start-up costs (which could place them in a refund situation until their business is established).
What might be my on-going tax obligations?
Once you’ve registered with Inland Revenue, do not put your tax compliance responsibilities on the backburner until the end of your accounting year. Throughout the year you should budget for payments before they fall due and keep your tax records up-to-date. If you don’t, you could risk the financial stability of your fledgling business and risk inviting penalties from Inland Revenue.
The second year in business can often be the hardest financially if you haven’t budgeted for tax payments. This is because in your second year you are required to not only pay tax on your business profits from the previous 12 months, but also to start paying provisional tax on your current year profits. Provisional tax payments are business income tax instalments you pay to Inland Revenue several times during the year; the frequency of your payments depends on how you choose to calculate them.
You’re required by law to keep accurate tax records, but it also makes good business sense. You’re required to be able to calculate your income and expenses. If you don’t have enough records to do this, then you’re not meeting your tax obligations and could face penalties.
You must keep tax records, such as the following, for a minimum of seven years:
- your cashbook, journals and ledgers,
- invoices and receipts, issued and received,
- bank statements and deposit slips,
- worksheets showing tax return calculations, and
- any other necessary documents to confirm accounting entries.
The records must be kept in English, and must be kept in New Zealand, unless otherwise authorised by Inland Revenue.
If you find an error in your returns you can write to Inland Revenue asking to have it corrected. If Inland Revenue find inaccuracies in your accounts, you could be audited and subsequently face penalties. However, if you make a voluntary disclosure to Inland Revenue, you can reduce the risk of being prosecuted and fined. The benefits of making a voluntary disclosure are greater if you point out a problem before Inland Revenue notify you of an audit, but there are still (reduced) benefits if you do so after – if you make a full and complete disclosure before the actual audit begins.
A word of caution however - while it is legitimate to minimise tax it is illegal to avoid it. Failing to declare income or profit is not a long-term strategy for a successful business! If you continue to struggle with your tax obligations always consult a tax agent or lawyer. To you help make the right decisions seek advice from Inland Revenue.
What about marketing my business, products and or services?
When undertaking strategic planning for your business you must look at the overall viability of the business and in doing so you will need to potentially answer a number of market related questions:
- What should I sell or provide?
- Who will buy or use my products and or services?
- What is the projected demand for my products and or services?
- What is the direct and or in-direct competition to my business?
- What is the best way to distribute my products or services?
- What is my competitive advantage/s and or unique selling point/s?
- Is my business in the right location, should I strategically co-locate and what about e-commerce?
- What price should I charge and can we make and sell sufficient products to produce a profit?
- How much did it cost to produce and how much margin/profit is wanted?
- What are competitors selling for and how does their product compare with yours in terms of features, quality, and or availability?
- How elastic is demand? Elasticity refers to how price changes as demand changes. Inelastic is where demand changes little as cost changes. You can charge more and customers will still purchase your goods and service. What is the optimum price to get the best return?
- Finally how much are people prepared to pay?
- Ultimately, your customers will determine how well you have priced your offering.
- What may happen or change in the foreseeable future that may affect my business?
- To identify potential threats early so to mitigate their effects and or change your market placement and or delivery model.
- To identify opportunities that keep enthusiasm, drive and commitment in your business and to capitalise on selling into new markets or start exporting activity.
- To remain aware of what is happening in your business area – what is the latest trends? Will they last? Will the internet and other technologies make a difference to buying habits? A ‘PEST’ analysis can be useful to identify what might happen - analyse your external environment based on four impacts: Political; Economic; Social; Technological. The most successful business people are generally those that sense or foresee future trends and adapt their businesses to exploit these coming changes.
The collection of information will be by differing means and will most likely need to occur daily. Much of the following you may do already however now with your business owner’s hat on you will apply a greater consciousness of what is being presented, seen and heard:
- Talk with your suppliers, customers, friends, competitors, your own sales people/front-of-house personnel, and business advisers – mediums like social media and blogs, Skype™, and mobile telephone apps making this increasingly accessible.
- Search competitors’ websites, subscribe to their e-newsletters and or mailing lists; even visit their business premises in person.
- Keep up with the latest trends; spend time reading newspapers, magazines and industry and trade publications – locally, nationally and internationally where appropriate with on-line subscriptions improving accessibility considerably.
- Take stock of ads placed on television, radio, billboards (fixed and mobile such as vehicles) and in newspapers.
- Consider travelling - both domestically and internationally - to see and or experience what is happening; attend conferences, trade shows and public exhibitions.
- Join industry or business associations; consider participating in the activities of community-good organisations.
It is of note that one of the key advantages of being a small business is the ability to take advantage of the market when things change – you are typically more agile, autonomous and your focus is very much (and needing to be) on catering to the needs of your customer. Your effort and time must therefore be spent on altering what you can control, not worrying about what is changing outside your control.
With the above information you will now have an excellent idea of how you are strategically placed in the market and will be in a position to employ your marketing tactics. Make sure your marketing is targeted. If you do not create a marketing plan that targets groups of customers, you may not only waste a lot of advertising money, you may also run the risk of losing the customer to a competitor.
Remember there are two main reasons why planning your marketing tactics is vital to your business:
- If you do not target your customer, someone else surely will.
- If you always do what you have always done, then you will get what you always got.
When it comes to marketing budgets there’s never enough money to cover all that you may want to do. Most businesses spend anywhere from 0 to 6% on marketing: 0% may be possible if you are clever enough and word of mouth has built to such an extent you have the luxury of not needing to promote however 6% is more likely to apply when starting your business and need stronger awareness in the market place and or if in a very competitive industry. Always have some contingency funds available as there will be times when even the best planning will not foresee events that you can, should or need to take advantage of.
The internet is an increasingly important means of letting others know about your company and the goods and or services it offers. There are any number of web hosts that will help to find and register a domain name and to design, publish and maintain your web pages – for a fee of course! Charges vary greatly, so shop around and find a service that best meets your scale, intentions (and future scalability if appropriate), and budget. If you are already fairly computer savvy you can do a surprising amount yourself.
E-commerce is becoming more and more ‘the’ competitive advantage for many small businesses and an operational and marketing tool not to be ignored. Employing such technology may in fact be the very cornerstone of your business activity or in the very least it may enable you to lower costs, improve customer relations, speed up delivery, be your customers preferred communication medium or may it create new income streams for you to exploit.
What constitutes intellectual property?
There are two parts to this:
- You do not want someone copying your idea, name or brand; and or
- You do not want to find out that your idea, name or brand is already someone else’s (or near enough that it is going to cost you money to defend or change).
Depending on what you are doing it may pay to look at trademark or copyright protection.
Most lawyers can offer a basic service, however, there a number of advantages of consulting with practices that specialise in this area of business development. You can so some background research yourself and the Ministry of Business, Innovation & Employment I Economic Development has a very comprehensive website detailing matters surrounding intellectual property. If you feel confident you can go through the process yourself by way of the Intellectual Property Office of New Zealand.
The Valley of Death!
Knowing about the valley of death could save your business.
This term refers to the start-up period where cash flow can run negatively for most businesses – lots of expenses as supplies/stock is purchased, product made, inventory accumulated, contacts made and promotions/marketing undertaken – but not much income!
Even if appearing to make a profit the business can run out of cash to pay its bills – which is another name for insolvency! However, it is a temporary thing as sales and purchases become more balanced over time.
Having a pool of funds, usually in the form of an overdraft facility, over this period may be a lifesaver. This is another reason why a cash flow projection a bank can buy into is a necessity. You will need to demonstrate with robust numbers that your business will offer a return on investment and within a reasonable period of time.
Do I need to think about an exit strategy?
The final word - Yes!
On the surface it may appear as a negative aspiration, in fact having an exit strategy is actually a positive and a recommended planning objective. Whether you initiate it or not, an exit strategy is basically a line in the sand at which your business is at a level where it can be sold as a going concern and you can make planned removal of yourself and or capital from the business.