The problem with running a small business – especially if you’ve never done it before – is that you can be tempted, in my grandmother’s phrase, to ‘eat out of the shop.’
In her day she’d seen many young couples dream of opening a little corner store, only to go bankrupt because they helped themselves to the stock when they needed a loaf of bread, or a packet of bacon, or took a few pounds from the till when they needed to buy something for themselves. They went out of business, sooner or later.
The basics of running a small business are quite simple. You start with adequate capital to carry you through the tough times. And you keep a tight control of your debtors and expenses.
Too many treat their business as a personal bank – a sure-fire recipe for disaster. You pay yourself a salary that the business can realistically afford – and no more. If business income is less than expected, cut your salary. Never charge your personal expenses to the company – pay them out of your salary.
Secondly, you are dependent on your staff. Every staff member must be essential –you can’t afford frills. Always pay them before you pay yourself. Without staff, you don’t have a business, so there will be times when they take home a wage at the end of the week, and you don’t. That’s the risk you, as the owner take. You can’t outsource it to your staff.
Pay your essential suppliers. Take advantage of whatever credit terms you can get, but make sure you don’t abuse them. Without them, you’ve got nothing to sell.
Set aside enough to pay the GST, super contributions, tax. If you don’t, the money won’t be there when you have to pay them.
Never be the owner who pays himself, but is sometimes a bit late paying his staff. “Sorry, it’s been a difficult month. I’ll catch up in a week or two.” You never will, and you risk the loyalty of your staff.
Do not pays the mortgage, business loans, alimony, kids school fees, the installments on your car, the insurance, out of the business income.
Take advantage of generous credit terms, 30, or 60, or 90 days to pay your suppliers. If you get into problems, offer them installments on account. “Business is very tight, you now.” But make sure you met those installments without fail – and catch up as fast as you can.
Do not renege on the installments while opening up an account with an alternate supplier. If you can’t pay one supplier, you certainly won’t be able to pay two, even if it does buy you another 90 days credit your first supplier wil no longer extend you.
How are you going to get back in the black? Get rid of non-essential staff and do more yourself. You can’t be an absentee owner. Cut your own wage, or take none at all if you have other sources of income. Sell the car. Take the kids out of private school. Tell the wife she’ll have to wait for her maintenance money.
You can refinance, but be careful. Can you really afford to? Take out business loans and secure them against the family home. Remortgage the home. Sell our unpaid bills to a collection agency. Sell your invoices to a factor. Of course, you lose 20-30% of their value that way, but it’s still income. It keeps the cash flowing.
Do not lie to the people from whom you seek loans, or you may end up owing more than your assets are worth. Make sure all of the debts you sold to the collector haven’t in fact been paid and you just forgot to record it. And don’t be tempted to hold some payments back from the factor. Eventually, they will both come to know these things and hen hey won’t trust you any more.
Don’t be tempted to scrimp on wages. Once you’re down to essential staff, make sure you pay them in full and on time. Don’t be tempted to skip paying their super, either – that’s illegal.
It is fatal not to pay contractors on time, too. They can’t wait six, seven, eight weeks. You may be tempted, because if they don’t like it they will go elsewhere – no notice, no severance, no entitlements. Plenty more where they came from. Cheaper, too, if you hire younger, hungrier types. But sooner or later you will run out of people to cheat. And they will spread the word.
If you don’t keep up to date with your payments, sooner or later you’ll run out of suppliers to turn to as well. No-one will extend you any more credit. There’s no more equity in the house to support a loan. Maybe you’ve taken out some loans without telling the lender about the other loans secured on the same property.
That’s fraud, and that’s a crime. So is trading while insolvent. So if not paying super. Now you’re in over your head.
Suppliers lose patience and start legal action. You stop paying the rent. You stop paying the installments on the office equipment and furniture. Finally, you stop answering your phone, your emails, and stay at home, wondering where it all went wrong. It’s all too much. It isn’t fair. You can’t sleep. You’re going crazy. That’s it! You’re going crazy! Quick, into a mental hospital. You’re sick, you can’t be expected to deal with all this business now.
While you’re there, your loyal staff gamely try to keep the business going, but it’s hopeless. Eventually it all caves in.
And all because you didn’t obey the rules for running a small business.