Small to medium enterprises (SMEs)

Definition
Role
Small to medium enterprises (SMEs) no
They provide jobs, r&d, increasingly
concise definition; can be determined by:
invest in overseas markets
number of employees (5-199)
Employ 73% in private sector
type of ownership idependent,
Produce approx. 50% products each
close control
year
sources of finance
20% of all money spent on r&d
legal structure
Provide range of products used by
market share - small
large businesses
management structure
Economic Contribution
Economy a system used to determine what to produce, how to produce and to whom
production will be distributed
Where do SMEs contribute to the economy?
1) Gross Domestic Product (GDP)
2) Employment
GDP the total money value of Employment keeps the economy healthy
all goods and services produced
employees spend their wages that support other
in Australia over a one year
businesses
period, measures economic
SMEs employ 73% of private sector employment
growth
& more likely to maintain existing employees
ABS estimates SMEs contribute
during economic downturn.
about 50% to GDP
Contribute to revenue raised through tax which
benefits the whole community
3) Balance of Payments (BOP)
4) Invention and Innovation
BOP is an accounting record of all
SMEs main source of most inventions and
monetary transactions between
innovations in Australia
Australia and the rest of the world
Invention and innovation are the heart of our
SMEs service overseas markets and
economy they improve efficiency and
export overseas much more than
increase productivity
larger businesses contribute to BOP SMEs spend a lot of $$ of R&D
& more flexible and responsive to the R&D intend to develop new ideas and
needs of overseas nations
improvements in production but it is difficult
To maintain a favourable balance of
for SMEs to obtain adequate finance as
payments export more than import
perceived as high risk
Innovation among SME employees is much
higher than larger businesses
Success and Failure
4 out of every 5 SMEs fail within first year.
Some factors that determine business success:
Location
Book-keeping standards
Access to finance
Adaptability & flexibility to change
Access to information and resources
Demand

Entrepreneurial ability

Influences in establishing an SME

Personal Qualities
Not everyone is suited to the role of business owner certain skills and personal
qualities required
People need to recognise strengths and weaknesses to decide if theyre right to be a
business owner
Qualifications
Need to be eager to work long hours
Can be any age offers opportunities and flexibility to retirees
No formal academic requirements to commence operating but there are tertiary
courses available these give you knowledge and understanding of what is required
to successfully own and operate an SME
Knowledge and understanding can come from experience and working for other
businesses
Need for motivation and the entrepreneurial spirit
Skills
Can be attained through experience, education and/or training
1) Experience
Working as an employee allows you to develop new skills as a result of training or
exposure to various aspects of the businesss operations
The best way to gain business experience if to work in the type of business in which
they intend to become self-employed
Experienced person will understand and be realistic about the demands financial and
personal that the business will have on them
2) Education and/or training
Courses available in many business and industry fields expensive and take a long
time to complete
Some government agencies provide opportunities to learn about starting a business
eg. the Buisness Enterprise Centres in NSW
Allow the business owner to develop the essential skills for establishing a business
accounting, computer skills, staff management, business admin, marketing
.Motivation
desire to transform an idea into a successful product by capturing the atterntion of
potential customers
business owners motivated by the rewards they believe can be gained from business
establishment monetary and non-monetary rewards
Entrepreneurship
Entrepreneurs must be:
prepared to take a risk and incur the results of the risk success or failure
confident in decision making and take responsibility for decisions
willing to succeed
creative and have flair allows them to create/seize new business opportunities
able to set goals and have a vision for the future adjusting business to changing
environment and setting new goals as others are achieved
continually adjusting to changing business, economic and customer markets

Benefits:
pride in having own business
freedom more control over their work
possibility of earning much more than being an employee & extra effort rewarded
through profits
satisfaction from guiding business growth - enjoy the challenge of overcoming
problems, setting and meeting goals, gaining a larger customer base
Burdens:
work hours much longer
difficult to separate life and work
may need to reinvest profits to generate long-term growth
risk having no income when business is establishing or debts need to be paid
Cultural Background
communitys traditions and beliefs eg high work ethic
Centuries of experience in certain trades or services eg. Thai person cooking good
Thai good
Gender
Women own approx. 1/3 of all small businesses in Australia.
Women setting up business from home is the fastest growing sector of the Australian
economy
Women-owned businesses have less external debt, are more profitable and are
profitable much earlier than men
Generally, female business owners:
Main reasons for establishing a business:
Aged 26-45
Desire to be own boss
Have solve financial responsibility
Want for flexibility due to family needs
Acquired business skills from
Personal challenge
previous work experience
Utilising skills and talents
Borrow little money
Achieving financial security
Restrictions in terms of promotion in
another job
Sources of Information
SME owners need assistance from government and private support agencies who possess a
variety of skills
Professional Advisers
Accountants provide valuable advice on all financial management issues and
taxation obligations. They have access to the latest changes to taxation and financial
reporting requirements.
Solicitors provide information concerning business formation and structures,
registration, contracts, leases, partnership agreements, patents and legislation
Bank Managers provide information and advice on financial services, sources of
finance and basic business management
Management Consultant provides advice on the best way to manage and operate
business while being more objective and unbiased
Government Agencies
Local - Advice on land zoning, consider development applications, assist with subsidised

land
State offers programs:
NSW Department of State and Regional Development provides information and
advice on starting a new business, buying a business, managing a small business
and enterprise agreements
Business Enterprise Centres Australia advice to SME owners on how to establish a
business and business plans
Federal
www.business.gov.au services businesses of all sizes with advice
AusIndustry advice of overseas exports, research and development of new products
and grants
Other Sources
Chambers of Commerce legal and financial help, economic and tax advice,
explanation of legislation and industrial relations information
Small Business Association of Australia and New Zealand lobby group of SME
owners that provide a forum for exchanging news and views relating to SME matters
Trade Associations specific industry info and advice
Libraries and Reference Material- access to reference material and able to locate
specific material
Australian Bureau of Statistics provides data on social, economic and demographic
trends
The Business Idea
Potential owners need a clear idea of what they wish to sell
Successful identification of a gap in the market is the key to establishing an appealing
business if there is no gap in the market, businesses need to do something
exceptional to draw customers away from existing bsuiensses
A business opportunity something an entrepreneur can see as an avenue to success
Identified when a person believes they can provide G/S in a better or different
wya from those already existing in the market
Ways of identifying a business opportunity:
Analysing and reviewing particular parts of the existing market to find a gap
for a particular G/S
Identifying whether many other people share a particular interest of hobby
Competition
Competition rivalry among businesses that seek to satisfy the
market
Business needs to decide whether to target product to mass or
niche market
o To help identify the level of competition and main competitors
o To help decide how to market and achieve a larger market
share strategies the business will use
Ways to achieve competitiveness
o Cost of production lowering production costs = lower selling
price = attract more customers
o Differentiation of product making it different, unique or
better

Establishment options
New 70% of market
Ideal for someone with a unique innovation or invention and/or recognizes a gap in
the market if not it can be very difficult to survive in the competitive environment
Advantages
Disadvantages
Freedom to set up as
High risk & uncertain
they wish
Difficult to secure finance
Able to determine
Time to develop customer base, employ staff and
growth and change
develop lines of credit from suppliers
Risk of no profits
No need to pay goodwill
Existing 4% of market
Need to know WHY the business is for sale
Advantages
Disadvantages
Existing customers
Difficult to access the value of goodwill
Easier to obtain finance
Difficulties with existing landlord
Employees may resent change to business
operation
Franchise 26% market
Makes use of an existing brand name and reputation
Advantages
Disadvantages
Successful business formula exists already
Franchisor controls operations
branding, reputation and operations
The threat of franchise
Immediate benefit from franchisors goodwill
termination can be carried out
No need for previous business experience
in some circumstances

Profits must be shared with

Low investment risk
the franchisor
Franchisor often provides training
Market
Goods and services
Businesses will fail without a market to purchase their products
It is important for businesses to undertake a market analysis
Market analysis collecting, summarizing and analysing information about the
market
Price
Price of products has a major impact on the business success
too high = loss of sales; too low = difficult to achieve profit
Price-setting strategies:
1. Percentage mark up increase cost prices by a fixed percentage to give a selling price
2. Recommended retail price recommended price by wholesaler or manufacturer of
goods to be sold
3. Price leadership and competition making sure that the price is in line with
competitors
4. What the market will bear determining how much consumers will be willing to pay
Location

Different businesses are suited for different locations.

Online Presence businesses are no longer limited to dealing with people physically
Easier to access
Location may be considered unimportant
Easy for home-based businesses

Finance
Businesses must analyse costs and determine how much funding is needed looking at
establishment and operating costs.
SOURCES OF FINANCE
Debt Finance
Obtained through loans
No need to sell ownership of the business
Flexible loan terms short term, medium term, long term
Equity Finance
Contributed by the business owner/s to start and then expand the business
No need to be repaid unless the owner leaves the business. No interest payments.
Risky as this investment may not provide the expected returns
COSTS OF FINANCE
Depends on type, source and term of finance
Type of finance will influence cost of capital.
For debt finance the cost is interest.
For equity finance the cost is the return (dividend for companies) paid at the end
of the financial year (if profit is made). The cost of equity finance could also be
measured in liability unincorporated can have business and personal assets
sold to recover debt; incorporated limited to assets of company and investments.
Legal
Business name
Every business name must be registered (except when the name is that of the owner
and no Pty Ltd, Co, etc. at the end)
If two traders want to register the same name, the first applicant for registration is
accepted but the second must register a different name
Zoning
Local government controls zoning regulations to plan areas for set purposes (eg.
residential, warehouse) and to assist planning
Owners must inquire with the local council to determine which zoning regulations
may apply to them
Health regulations
Local councils have requirements and standards for businesses to meet to receive a
license to operate their business.
Health inspectors assess the business regularly (often without warning). This is to
ensure that the business maintains these standards
Human Resources
Skills

Skilled employees are highly productive and result in creating wealth for the business.
Its important for businesses to maintain the skill level of their employees.
Training is also an option to develop the skill base of existing employees
Costs wage and non-wage
Businesses will only employ if the return is greater than the cost total cost is not
solely wage/salary but also on-costs
Taxation
Taxation the compulsory payment of a proportion of earnings to the government
In order to operate a legitimate businesses, taxes must be paid
ABN given to every business and used when dealing with government departments
and agencies
Federal & State taxes
Tax is an important source of funding for the government
Federal Tax includes company tax, group tax (imposed on employee), GST
State taxes include stamp duty (leases, mortgage, car registration), land tax
Local rates and charges
Rates property tax
Water and sewerage
Waste management service
Development and building approval fees

The Business Planning Process

Business plan detailed proposal for a potential business that sets up business goals
and summarises and evaluates the business concept in written form
o useful reference point for the running of the business
o ensure the long term success and will help an owner avoid business failure
o assist SMS owners to arrange finance as they can prove that the business has
strong foundations
Common elements executive summary, goals, strategies, business description and
outlook, management and ownership, key business function sections (operational,
HR, finance, marketing)
BENEFITS
o Identify business strengths and weaknesses
o Assist the business to be proactive not reactive
o Indicates the owners ability and level of commitment
o Forces the owner to focus
Sources of planning ideas
Involves setting goals and deciding how to achieve them link between the owners
idea and business operation
Important to look at the internal and external business environment for planning ideas
Need to have access to relevant and accurate information will allow the business
owner to prepare a superior business plan
o Info can be sources from within the business (eg. management, employees,
R&D) or externally (eg. accountants, consoulates, journals)
SWOT/Situational Analysis
SWOT strengths, weaknesses, opportunities, threats
Need to be specific to the business and detailed. Identifies strengths, weaknesses,
opportunities and threats.
Can be used in all stages of the business life cycle/planning process
STRENGTHS
WEAKNESSES
Internal factors
Internal factors
Eg. what is the business good at? Are our
Eg. poor technology, poor location,
employees motivated?
unmotivated workforce
OPPORTUNITIES
THREAT
External factors
External factors
Eg. economic boom, low interest rates,
Competition is usually one
potential overseas markets
Eg. new regulations (impacting the business)
Vision, Goals and/or Objectives
Vision
Vision statement broad statement of the business purpose and aspiration
May relate to customers or employees

Should be concise,
focussed and realistic
Objective specific statements
that outline exactly how the
business will accomplish its
vision and/or goals
Strategic, tactical and
operational objectives are
defined by different levels
of management.

Business Goals
Goal more specific statement of what the business intends to achieve
Many businesses aim to achieve these main goals:
1. Maximise profit
2. Social benefits for the community
3. Person individual preferences
Goals can be:
Financial (eg. profit, market share, growth and diversification, share price)
Social (eg. community service, provision of employment, social justice, ecological
sustainability)
Personal goals of the owner, not usually in business plan or mission statement,
motivate owner (eg. higher income, financial security)
Long-term Growth
Long-term growth - the ability of a business to continually expand
Depends on ability to develop and use asset structure to increase sales, profit and
market share
Requires comprehensive, strategic planning
Logistics the management of business operations
profit maximisation
Strategies:
o Customer feedback
o Supplier and customer partnerships
o Product innovation
o Sigma six management approach that attempts to improve performance by
improving quality, reducing costs and creating new opportunities and making
99.99% of all manufactured products defect free
Organising Resources
Need to identify business necessities and get them where they need to be
Resource allocation the efficient distribution of resources to meet established goals
Establishes what work will be done by who and under what conditions
Operations
transforming inputs into finished or semi finished goods

need to source equipment, supplies, knowledge, storage & warehousing, delivery

systems
determining:
o type of equipment and raw materials and their suppliers, cost
o storage, warehouse and delivery systems requierd
o level of technical expertise required for maximum production
may need CAD (computer aided design) and CAM (computer aided manufacture) to
maximise efficiency
Marketing
all sections of the business must be involved in meeting customer needs and wants &
achieve goals
need to be integrated into all aspects of the business therefore need to devote adequate
resources to this plan
Finance
new business ventures require funds to operate
need to look for most appropriate source of finance
determine amount of equity (business ownership) that the business owner is willing to
hang over to obtain financing
explore government funding & grants - monetary/financial assistance that doesn't
have to be repaid
o not usually for new bus but expansion, r&d, innovation, exporting
Human Resources
employees are an SMEs most important resource - invaluable assets
need for good recruitment and selection processes
need to comply with legislation - anti discrimination and equal employment
opportunities
Forecasting
Forecasts are a business's predictions/projections for the future.
Total Revenue & Total Cost
These forecasts attempt to predict the amount of money a business will receive from sales
(revenue) and the amount of expenses they will incur (cost). These estimates can be made by
determining the demand for the businesses product and the amount of competition.
total revenue - total amount received
total cost the sum of fixed and variable costs
from sales
two parts:
calculated by the quantity of goods
o fixed costs consistent and predicatble
sold multiplied by the price that
o variable costs unpredictable, random or
theyre sold for
dependent on the amount produced
These figures are interpreted in break-even analysis and cash flow projections. They allow us
to predict profit levels

Break-even analysis
break-even analysis determines the level of sales
needed to cover production costs
Management can determine
sales required to obtain profit
from this analysis.

Cash flow projections

cash flow projection - shows change to cash position by business activities
set out the same as cash flow statements but makes predictions
show WHERE the changes to the cash position have occurred
consist of a month by month projection of cash flow in/out of the business
positive cash flow occurs when more money is flowing in than out
if a business has too much cash sitting idle, resources used inefficiently or are
underinvested
show how much investment is needed and the health of the working capital in the
business and overall efficiency

Monitoring and Evaluations

Monitoring involves observing changes and looking at the external influences on the
business.
Firstly, the business must establish a performance standard. A performance standard is a
forecast level of performance against which actual performance can be compared.
Secondly, the actual performance is evaluated against the performance standard.
By doing this, a business owner can evaluate the effectiveness of the business plan.
Evaluating is about comparing against standards and planned goals.
Need:
figures from past & present to track improvement
business plan to monitor goal progress
budget to compare figures
The owner needs to evaluate whether the business operations achieved the desired results and
why.
Monitoring and evaluating can ensure the long term success of the business.
Sales
Sales management control involves comparing budgeted sales against actual sales and
making changes where necessary
Budgets
Budget the businesss financial plan for the future outlining how the business will use its
resources to meet its goals
contains projections of incomes and expenses over a set period of time
enable constant monitoring of goals and their progress
used in planning and monitoring aspects of a business
needs to be regularly compared with actual revenue and expense amounts
modifications can be implemented if there are discrepancies
Profit
Reasons why profit must be carefully monitored and evaluated:
1. Profit as reward it is the return/reward that business owners receive for taking the
risks in business operations
2. Profit maximisation main goal of a business
3. Profit as a source of finance profits need to be reinvested to ensure that the business
can grow
4. Profit as a performance indicator indicates business performance
5. Profit as a dividend payment for incorporated businesses, some profit is allocated to
shareholders
Taking Corrective Action
Corrective action is important to ensure the business can continue to function.
Modifying the process of changing existing plans, using updated information, to shape
future plans
If performance standards cannot be met, the situation cannot continue and the business owner
must undertake corrective action/modification

Critical Issues in Business Success and Failure

Importance of a business plan
A business plan is essential for business success.
Must have:
Concise statement of goals
Detailed strategies for achieving goals
Tools for measuring performance (break-even analysis, forcasted profit & loss,
market research)
Presented to stakeholders, investors, potential sources of finance, accountants etc.
Reflects the skills and abilities of the owner
Management
Management coordinates resources (inputs) to achieve the stated business goals
Resources need to be allocated and used efficiently to maximise quality and minimise
costs
Staffing
As employees are a businesss most important resource, necessary resources need to
be allocated to get good employees
HR managers
Outsourcing the recruitment process is becoming more common as it can be
costly and time consuming when done in-house
Skills audit detailing the skills base of all employees in order to get the right mix of
employees, plan skill acquisition and future training needs, identify weaknesses in
skills
Skills inventory a database that outlines the skills, abilities and qualifications of
employees
Appraisals the process by which an employees work behaviour is evaluated and
the results are used to provide feedback showing where improvements are needed
and why
way of assessing skill base
determine training needs and who will be promoted, demoted, retained or fired
Teams
Benefits of team work:
Idea sharing
Informed decision making
Less need for supervision employees monitor each other closely
Employee cooperation
Improved output
Trend Analysis
Highlights patterns and changes in business performance
Sales, revenue, operating costs, gross and net profit can be graphed
Trends are used to forecast changes when budgeting for the future
Identifying and Sustaining Competitive Advantage
Competitive advantage where a business does something better than a competitor
and has the edge on competitors in a particular area of production

Sustainable competitive advantage a competitive advantage that is maintained

over time

Ways to maintain a competitive advantage:

1) Costing and

Undercutting

pricing strategies
competitors

Reducing production
costs

Reducing input costs

Specialising labour in
production

Automation replace
labour with machines
2) Differentiate

High end quality or low

products
end throw away goods

Innovative design

3) Staying ahead
of competitors

Research & product

development
Patents and copyrights

on inventions
Creating barriers for
entry to competitors

Outsourcing
expensive parts of the process
Increased
production (in bulk) reduces
unit costs
Overseas
production cheap labour
Brand name and
image
Location and
level of service
Market research
pitching marketing
Lobbying
government and interest
groups
Exclusive
contracts with other businesses

Avoiding over-extension of finance and other resources

Overextending the business financially puts the cash flow at risk
Overextension of finance can occur from over borrowing, over purchase, over
staffing
Avoiding over extending the business involves:
Planning
Less dependence on debt financing ratio debt to assets
Financial planning through analysing trends
Start small
Expand when market is ready
Using Technology
New technology changes the way business operates
Advantages:

More efficient production times

Communication reduced delays, global

Reduced labour costs

Better quality output graphics & design

24 hour access

Information sharing, access and up to date

e-business - using the internet to conduct business eg. emails, schedules, licenses

e-commerce - using the internet to buy and sell goods and services

Using new technology incur an initial cost however, the long term benefits are far
greater

Economic Conditions
The economy affects the country as a whole. The better the economic situation, the
more willing customers are to spend money.
Economic indicators:
Inflation
Savings
Spending levels
Interest rates
Demand
Foreign investment
Economic growth
Currency
Unemployment rates