When starting up a new business, structures and systems are often a low priority in the mind of the business owner. It is wise, however, to consider for the future, as what could seem an insignificant difference in the early stages could have a much larger impact down the track. Cutting corners in early stages could prove costly in the long run.
This is not to say that changes to structure or systems will not be appropriate as the business develops. But we should Begin With the End in Mind (Stephen Covey, 1989) and continually work to achieve that end.
Two aspects of the business that should be carefully thought through in planning for sustainable growth are:
1. Structure
In the early stages of the business, an owner will typically work in the business and draw his living requirements out as wages, interest, rent, profit share etc. or a mix of the above. However, as the business grows, the following factors become more important:
- i) Whether the structure of the business is suitable to include other investors (in Australia, a discretionary trust is not suitable);
- ii) Whether the business could be sold under a share sale arrangement (as compared to an asset sale);
- iii) Whether the entity type experiences any restrictions in dealing with large corporates and government departments (some organisations will not deal with trusts).
The more conventional a business is, the better suited it is to growth without major restructuring during its life cycle. Restructuring can be expensive in terms of capital gains tax and income tax, and can also be a hassle administratively (changing ABNs, Bank Accounts, Insurance, Customer and supplier approvals etc.). We would strongly recommend the structure is established taking into account the medium- to long-term plans for the business.
2. Systems
Similarly, the systems a business uses should be reviewed periodically to ensure that the business will not be disadvantaged or restricted in the next stage of growth. A system should be able to handle volume.
A system in this context is made up of the following:
i) The software platform(s)
ii) The processes that are in place to run the business.
In a typical modern software program, all parts of the business are integrated. This means that a change in processing made for expediency in one part of the business may create errors or issues in another. E.g. adjustments to stock quantities made to allow invoicing to processed has distorted the average cost of stock for accounting and profitability reporting purposes.
Simple is Better is a good rule of thumb. In this context, simple does not mean incomplete; all users of information in the business must have their needs provided for to ensure completeness. Only once this has been achieved can simplicity be pursued.
Part of achieving this simple approach is that transactions should be processed in the least number of steps. Re-working and re-keying information creates complexity and scope for error. The system and its related processes should be planned and reviewed regularly to ensure that it supports the business and does not become a drag on the energy of all concerned.