Australia’s small business failure rate is soaring through the roof, but there are many positive stories too. Successful entrepreneur Terry Johnston from Newcastle Carpet One shares his tips with us. This is the first in our series that explores how to run a small business in Australia.
Right now, the odds are not in your favour if you’re planning to set up a company.
What percentage of small businesses fail?
Half of all small to medium business crash and burn in their infancy, according to the Australian Bureau of Statistics.
Their downfall? Poor cash flow. Around two million Australian businesses spend more money than they make. This hits their bottom line, where it hurts the most.
More than a third of Australian entrepreneurs withdraw money from their personal savings to revive their business cash flow. This usually ends badly – stifling their ability to support their families, hire new employees and pay current staff.
It also drains the economy.
Unfortunately many entrepreneurs are forced to close their doors within three years of launching.
But it’s not all doom and gloom! Don’t be put off by the small business failure rate in Australia. For every collapse, there’s a success story, like this Newcastle carpet and flooring store.
How to run a small business in Australia: What do successful entrepreneurs say?
If you get stuck into good habits, you’ll see progress in the early days. Just ask Australian small business owner Terry Johnston from Carpet One Newcastle.
It’s worth noting that Terry purchased an existing business. This gave him a pool of clients to dip into, which allowed him to turn a profit almost instantly.
It also helps that Carpet One Newcastle belongs to a co-operative model that promotes common economic, social and cultural goals. Co-operatives stand out because they’re owned and governed by members. Funds are used for mutual benefit and there are no franchise fees!
But does he do anything in particular to maintain a healthy cash flow?
How to run a small business in Australia? At a glance:
- Make sure your payment terms and conditions work in your favour
- Pay yourself a salary (even if it’s low)
- Don’t be lazy about managing financial records
Set up strong payment terms and conditions – Terry from Castle One Newcastle:
When dealing with consumers and retailers, Terry sets up his payment terms to get paid straight away.
However, it’s different when the shoe is on the other foot and he’s buying services. In these cases, Terry negotiates for the deadline to be as long as possible. As an example, this could be 30 days instead of 14 days.
Are you wondering how to negotiate payment terms with suppliers? Just bite the bullet and ask! You never know where that will get you.
“One of the biggest problems with people when they negotiate is that they don’t ask. They feel ashamed or embarrassed to ask a question. If you’re not feeling ashamed or embarrassed, then you’re not asking a tough enough question.”
Terry from Carpet One Newcastle
Most importantly, always pay your suppliers on time, whether you like their terms or not. Terry finds that building trust gives him room to negotiate further down the track.
When you reach that stage, you’ll be using your suppliers as a bank, in a sense. This gives you some money to lean on, in the event that clients pay you late. Although this is something you want to avoid, an any rate.
“Pay suppliers as late at your agreement allows, but you need to keep the retailers and consumers that come in. You want them to pay you as quick as they can, so we set up our terms for payment from them as quick as we can.”
Terry from Carpet One Newcastle
To sum it up: build trust with your suppliers by always meeting their payment deadlines. This will give you more wriggle room in the future. But set up your payment terms so that clients pay you straight away. This will help you avoid the problem of late bills – the undoing of many Australian businesses!
Many small businesses are not being paid on time in Australia:
If you’ve ever paid a bill late, you might think “no biggie, the sky hasn’t come crashing down yet.”
But many small to medium enterprises on the receiving end don’t fare so well.
One late bill may seem like a drop in the ocean, but the cumulative effect is like a tidal wave that wipes out small businesses.
Apparently the laid back attitude that Australia is famous for extends to paying our bills as well. Nearly half of Australian small enterprises are owed more than $20 000 – according to an inquiry by the Australian Small business and Family Enterprise Ombudsman.
The federal government is pressuring big businesses to sign a voluntary pledge. This was created by the Business Council of Australia, as one way to tackle the problem. Signatories to the Australian Supplier Payment Code commit to paying all suppliers on time.
But Greens Senator Nick McKim says this isn’t enough. In June, he announced plans to introduce legislation enforcing prompt payments.
Payment times by Australian corporations are by far the worst in the developed world.” Senator Nick McKim told Accountants Daily.
“Financial penalties on big corporations and governments for withholding payments will help ensure small businesses, subcontractors and freelancers are paid on time.”
Getting paid on time is a big issue for small businesses in Australia, which brings us to our next point. Give yourself a salary, especially in those early days when unpaid invoices could force you to live off canned tuna.
How to run a small business in Australia? Pay yourself! – Terry from Carpet One Newcastle:
“You can pay yourself a shitty little wage, but you have to pay yourself.”
Terry from Carpet One Newcastle
Terry stresses the importance of paying yourself. Many business owners fail to do this, because they don’t want to detract from their business. This is a big mistake, since you’re putting all your eggs into one basket.
“Your business needs to manage its own finances, and you also need to manage your finances in your personal life. The two actually should be managed separately.”
Terry from Carpet One Newcastle
At least pay yourself enough to get by, until your business is financially stable (operating in the black). And if you start with what you’re worth from the get go – you won’t fall into a false sense of security. Your books will accurately reflect the health of your company.
Speaking of record keeping, make sure you set up solid practices around managing your finances.
How to run a small business in Australia? Don’t get lazy about managing financial records!
Many business owners neglect to review their finances and expenses on a regular basis. It’s important to examine revenue and expense reports each month, to keep track of progress, as well as potential pitfalls.
The Australian government provides a handy and quick guide for good record keeping.
You can hire a bookkeeper or accountant if you’re too busy to do this yourself.
Read the full transcript from our conversation with Terry Johnston, to get tips on how to run a small business in Australia.
Transcript with more info on how to run a small business in Australia:
Are you the founder?
Terry: No, we bought an existing business.
What do you sell?
People can buy from you both in store and online?
No, only from the store, online is more just an information portal.
Is your business part of a franchise?
Terry: Carpet one is actually a cooperative model, not a franchise model.
So how does that work? Specifically in terms of cash flow and revenue?
Terry: I don’t pay franchise fees, in doing so we keep our overheads lower. But being part of a cooperative means we get buying power from being part of that group.
Is this buying power from manufacturers, because you can bulk buy with other people in your co-operative?
Terry: Yes, in terms of a business model, for us it’s more cost effective than a franchise. In a franchise, the owners make money, not the franchise.
Put yourself in the shoes of an entrepreneur who wants to figure out how to run a small business in Australia. What are the major expenses you have to cover on a month-to-month and year-to-year basis? The main areas I’m thinking: rental of office space, staff spaces, insurance, accounting, marketing and other core products and services.
Terry: That’s basically it. The only other part, I don’t know if it breaks it down, is all the IT and phone systems. It doesn’t seem like much, but it can cost a lot of money, when you add up the IT components.
Just how expensive can IT be?
Terry: I think we spent like 20 grand in the first 2 months.
Is that mainly for set-up or is it an ongoing cost?
Terry: It was just a set up – it can be one of those areas that bites you.
How many staff do you have working for you?
Terry: We now have 6 full time and 2 part time staff.
Do you mind me asking what your annual turnover is? How much of that goes into things like insurance, marketing and accounting?
Terry: I don’t mind! As a ballpark figure our year to date figure for last year was 2.043 million, so just over 2 million dollars. Our cost of sales was around 63 percent.
Does cost of sales refer to your total outgoing money?
Terry: No, no, that’s the cost of the goods you sell – installer costs and things like that.
So 63 per cent of the total revenue is just to get the product in your hands, in order to pass it on to customers?
Terry: No, it gets it in my hands but it also gets it installed.
So you don’t just sell the carpets but you install them as well?
Terry: Yes we do install flooring and carpet, most stores use an installer and they subcontract everything. We do installation in house but we subcontract as well.
And that 63 per cent is before any other costs like staff, IT and that kind of thing?
Terry: Yeah so that’s 37 per cent GP – gross profit. And out of that gross profit comes all your expenses – your accounting, advertising, all that good stuff.
What are some of the biggest cash flow challenges you’ve faced that aspiring successful entrepreneurs can learn from? For example, what’s the impact of seasonality on your business?
Terry: Seasonality is most certainly there. I underestimated how big the seasonality shifts were in this business and it hurt us. The January-February period is quietest, so I basically didn’t have enough money in the bank in the first year. I covered all my bills, but I didn’t actually get paid myself in Jan and Feb of that first year. That’s not a good position to be in.
The other thing I‘ve learnt is that you have to pay yourself. A lot of people underestimate this – you know, you can pay yourself a shitty little wage, but you have to pay yourself.
Is that from a motivation point of view?
Terry: No, the reason behind that is to make sure your business and personal expenses are different. Your business needs to manage its own finances, and you need to manage finances in your personal life. The two actually should be managed separately.
That’s good advice, because you can see how easily people can mix those two.
Terry: Yeah! The next bit of advice is to get the payment terms for your suppliers as long as possible. So at the end of month…possibly 30 days – how long it takes for me to pay my bills.
In other words, giving yourself as wide a buffer as possible to pay other people?
Terry: That’s right, because I use my suppliers as my bank.
Pay suppliers as late at your agreement allows, but you need to keep the retailers and consumers that come in. You want them to pay you as quick as they can, so we set up our terms for payment from them as quick as we can.
That makes sense. I’ve actually heard of Woolworths doing that to their suppliers. They might take three months to pay for an air conditioner to be fixed. This gives them a huge buffer to work with.
Terry: Absolutely, it means you’re using your suppliers as a bank and that’s what we do.
When you say “using them as a bank”, do you mean you’re using them to introduce a staggered payment?
Terry: Yeah, I’ve already bought the product and installed it, before I have to pay for it.
Good advice, but obviously you have to balance that so your suppliers don’t get ticked off with you?
Terry: Yes that’s right – and that leads to the next bit of advice, pay your damn bills! *laughs*
It sounds funny but honestly – because I took over an existing business, we’ve established relationships through that. This behaviour gives us better pricing on products and more favourable terms.
Yeah, because of your history and trust…
Terry: Yeah the trust was built and don’t underestimate that trust, believe me
It seems your advice was not to “screw over your suppliers by paying them late”. Instead it was to “look at the payment terms and try and arrange terms that are favourable to you”. So you’re still actually completely above the table doing what you need to get done?
Terry: That’s right! If the deadline is 14 days and that’s the best that I can negotiate, then we still pay on 14 days. But down the track, we get the terms out to end of the month, plus 30.
It seems to me that you do push back on some of the terms that your suppliers lay down. An entrepreneur who just started their business may underestimate to what extent they can negotiate. What gives you that leverage to negotiate? Is it mainly the history (as you said, paying the bills first), or building the credibility?
Terry: Yeah there’s certainly that part of it (building the trust). But one of the biggest problems with people when they negotiate is that they don’t ask. They feel ashamed or embarrassed to ask a question. If you’re not feeling ashamed or embarrassed, then you’re not asking a tough enough question.
Good advice! Do you keep a cash buffer in case of emergencies for your business? Related to that, how many months could you go without revenue?
For example, when Bill Gates had Microsoft, he was quite paranoid because it’s a very turbulent industry. He could go a whole year without any revenue. Obviously that’s a bit extreme but it’s related to that kind of person.
Terry: It is, but I’m not that extreme. I would like to have basically three months of expenses under my belt. That’s the advice I’d give to people. Now I’ve been only what, 15 months? I’ve only got a little bit over a month under my belt of saved cash.
But you could build the three months?
Terry: Yeh, that’s what I’m trying to do.
Many entrepreneurs want to know how long they’ll have to go without earning money if they jump into something. How long did it take for your business to become profitable from when you walked in? This might not be directly translatable to you, since you bought an established business.
Terry: We jumped into window furnishings (so blinds and shutters). That’s been going on now for about 3 months and we’re not even coming close to covering its costs. I’m not even expecting it to cover its costs for like 6 to 12 months. We’re just introducing a new business line and it’s not profitable, so it really depends on the market
But I assume that was a lot smoother for the main Carpet One services?
Terry: Yeah it was, because we already had existing clients. It was quite easy to transition and be profitable almost immediately.
Hence the advantage of buying a business versus starting one from scratch?
Terry: Yeah, definitely!
Great, thanks for sharing your insights about how to run a small business in Australia with us.