Transitioning from employee to business owner
Whilst there is a multitude of reference material available from small business and government websites (e.g. business.gov.au), the decision to make the change from a Pay As You Go employee career to a business owner can be quite a project. Like all projects, the initial success of the business can be influenced heavily by good planning, good advice, having access to experienced sponsors and limiting the number of unknowns.
End to end planning or a ‘bottoms up’ approach is a detailed, methodical approach to setting up a business. In most practice businesses, this can generally be separated into:
- Accounting, Tax, Legal and regulatory
- People, Processes and Systems
- Fixed Assets, Cash Flow and Cost Management
- Customer Experience and Revenue Drivers
- Supplier Relationships
Your business plan ought to address each of these topics with the level of in-depth analysis dependent on the size and complexity of your business.
Accounting, Tax, Legal and regulatory
People who have spent time managing or creating businesses in the past recognise the importance of receiving great Accounting, Tax and Legal advice from the outset. Whilst this will involve budgeting for professional fees before the business has potentially made any income, it will provide the business with good structuring advice that will potentially save the business money in the long run. Early stage decisions that you will make in establishing your business will involve preparation and review of legal contracts e.g. property lease agreements, employment contracts, shareholders agreements, supplier agreements, franchise agreements and review of regulatory requirements that are part of setting up a new medical business. A specialist in this area that deals with medical and allied medical businesses may be the best alternative and can be found through publicly available sources such as the Law Society in your respective stage – e.g. :
Similarly to legal advice, sound tax and accountancy advice is important as it has an ongoing impact on the effectiveness of the businesses and may avert future hidden costs as your business generates future earnings. Connections to proven tax and accountancy advice are important and tailored advice suitable to your professional field is preferred. There are a broad set of accountancy firms in market and it may be of benefit to look outside of the geographical proximity; the nearest and cheapest may not always be the best choice. Another factor to consider is their exposure to the industry and the number of businesses that they currently serve. If they are unable to provide these statistics with any level of confidence, then you may want to consider alternatives.
People, Processes, Systems and Location
The formation of your business from a legal and accounting perspective is one thing, but realistically, the focus will quickly shift to or start off with the essential intangible items that make your business tick; having the right People, instituting the right repeatable Processes and implementing a system that will reduce double handling or manual intervention. What this means is focusing on the hygiene factors that apply to all types of businesses i.e. who will be in your team of staff, do you have people in mind today? If not, where do you find them? If you are planning to be an owner manager, what level of skills do you require around you to maximise your value to the cash earning capacity of the business.
Tapping into someone in the industry who has done it all before is also is also helpful in identifying and navigating through obvious pitfalls, but also to identify future growth opportunities. Having access to a mentor or coach, whether casual or formal provides a different perspective on how to run your business.
Systemising as many parts of your business processes (sales, accounting, procurement, payroll etc…), without adversely impacting your customer’s buying experience is a key part to any business. Whilst it may sound like common sense, there have been quite a few pitfalls in businesses that have delayed the systemisation of processes in the belief that they are saving money in the short term. Over time the cost of these decisions can sometimes resurface in rework, poor accounting records and wastage.
The challenge with software and applications is that these are constantly evolving. Using something that is scalable, but also easy to replace if need be without losing critical business information is preferred.
Protecting your business and staff with the appropriate business, general, professional and public indemnity insurances is a non-negotiable in many lines of business. Employee specific obligations also exist such as workers compensation cover, superannuation liabilities and payroll.
If your practice is heavily reliant on patients coming through the door, as opposed to you going out to see your patients, then operating from a site that is easy to find, has plenty of parking and is next to other essential services is very important. Many practices receive direct and indirect benefit from being located in a spot that is visible and easy to get to; this also applies to providing access to patients and customers that may not be wholly mobile due to lack of transport options, age or disability.
Other indirect advantages can exist by setting up location near other specialists or health facilities as this convenience tends to centralise patient flow to the one precinct. Convenience advantage also extends to being co-located or in walking distance of public transport and major shopping centres.
Fixed Assets, Cash Flow and Cost Management
As you negotiate a suitable premises lease (including potential rent free periods and fitout incentives from the landlord) and have sourced design and fit-out services for your practice (whether setting up a new site or upgrading an existing site), you will need to consider the tangible assets that will form part of your practice and the best way to pay for these items. Fit-out and necessary operating equipment are typically lumpy purchases that are essential to housing your business. These items are known as fixed assets and will tend to have a long economic use and economic life (typically 5 – 7 years – some equipment may even have an economic life beyond 10 years). A good guide as to the effective life these types of assets can be found on the ATO Website. One of the most important rules for cash flow management is to try and match the cost or use of the asset with the revenue which it generates. This matching principal promotes efficient use of assets and helps maintain liquidity within the business. As an example, an asset with an effective life of 5 years may be better suited to be acquired using a 5 year lease agreement with fixed and predictable payments over the 5 year term. At the extreme, it would not be recommended for example that you would acquire a long life asset with a short term funding facility like an overdraft or credit card, because these forms of funding are “come and go facilities” that are best suited for short term cash flows like sales receipts and payments to trade suppliers.
Investing your own cash in highly depreciating assets is also generally discouraged unless the payback is very short. Once your cash is spent on a highly depreciating asset, it won’t be long before you have to reinvest in that asset to keep it up to standard. This is where a cost advantage could be achieved by leasing depreciating assets and instead investing your cash for other opportunities to grow your earnings.
Cash flow management is the life blood of most businesses. Many medical practices will have a cash flow cycle where there are regular cash receipts from point of care payments and MBS rebates over a short period of time. Payment outflows to suppliers, employees and tax authorities will tend to be more irregular and can vary out to 14 – 45 days. This typically creates a cash flow surplus each month (since the practice will be collecting payments significantly ahead of having to payout external parties), this will require some degree of discipline so that cash is preserved or provisioned for these external payments when they fall due.
Customer Experience and Revenue Drivers
Once all the financial, accounting and legal frame work is in place and you have your insurances and systems to run your business, you will need to turn your mind to customers and creating the buying experience that will have a direct impact on the ongoing success of your business. For many customer facing businesses, this will begin at the marketing stage (online presence, branding, information sharing) and progress all the way through to the physical experience once the customer walks into your practice. At the end of the day, whilst location will draw customers to your business, customers will keep coming back to your business for the next transaction based on the experience they receive and may even recommend friends and families based on this experience.
Things to think about in this regard include convenience, customer service, experienced staffing, access to product and complementary product offerings. Other intangible considerations involve ample lighting, signage and a comfortable setting.
Establishing a strong and reliable referrer base from local practitioners or services providers to the medical industry provides an ongoing source of revenue for the business and can create goodwill for your brand compared to other providers. This will require investing some of your time in networking activities and attending industry events to maintain relationships with your referrer sources and also keep pace with changes in your referrer’s underlying businesses.
Reliable supply of product, multiple options and low cost supply are key inputs in maintaining stable Gross Profits within your business. The higher the Gross Profit of the business the more one of costs or fixed costs the business can absorb during growth phase.
From a risk management perspective, where possible, and if cost allows, having a couple of suppliers to create competitive tension and diversify supply risk should be considered where appropriate. This needs to be counterbalanced against discounts that may be achieved by committing a large volume of your product supply to a particular supplier.
The information contained in this article (“the Information”) is general in nature and does not take into account the particular business objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial, legal or tax advice or recommendations (expressed or implied). No decision should be made on the basis of the Information without first seeking independant financial, legal and tax advice. Eclipx Commercial does not represent or guarantee that the Information is accurate or free from errors or omissions and disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Eclipx Commercial owns copyright in the information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of Eclipx Commercial.