Starting a New Business – A Guide to the essentials

You want to start a small business and don't know where to start. A small business start up is tough, and keeping the doors open is even tougher.

To add to this, it is a challenge starting your own business in South Africa. World Bank surveys rate South Africa 82 out of 190 economies when it comes to the ease of doing business.

Ease of doing business is easier for those small business owners with start up capital. Ease

There are many people who dream of starting their own business and having financial independence and the independence to structure their lives the way they want. Unfortunately, there are many people who start their own business and fail dismally.

Statistics on new business has show that:

• 80-90% of start-up businesses fail within the first 2 years;
• Of the remaining 10-20%, approximately 80% fail in the following 3 years;
• The 2-5% of businesses that survive the first 5 years will most probably survive and be successful in the long run.

These are sobering statistics. In this article we aim to cover some of the key points to consider when you start the planning phase prior to launching your own business, to maximize your chance of being a successful start-up. This is not meant to be an exhaustive list of things to consider, and steps to take, but rather is meant for you to use as a guideline in your initial planning stages - to get your creative juices flowing.

It is advisable to appoint a Qualified Accountant and Tax Practitioner right from the onset so that you are guided on the right track to success. Consider this as an investment in your future. You should also budget for this in your business launching and operating costs.

Here we will examine the crucial steps required in the start-up phase that are needed to carry you through the first 2 years, while you are building up your reputation as a reliable and sustainable business that is able to respond to its client’s needs.

1) Market Research

Market research will help determine if there’s an opportunity to turn your idea into a successful business. It’s through market research that you gather information about potential customers, suppliers and businesses operating in your industry and area.

This will include what type of customers are you looking to capture, what is their income bracket, how will you access them, where are their gaps in the market for your type of product and service, how many competitors are there to your new business idea, the size of the market and each of the main competitors, the costs of their products and services, to name but a few.

This information is what will be used to find a competitive advantage for your new business. In other words, what you can offer in terms of product and/or service that will be a USP (Unique Selling Point) vs your future competitors. Without a USP you are not unique, but rather just another business offering the same product or service as others.

Market research combines consumer behaviour and economic data and will confirm or improve your business idea. Without this first step being undertaken in a diligent, in-depth and targeted way, you will be operating in the dark, and are setting yourself up for failure.

It is critical that you fully understand your customer base from the beginning. By conducting market research, you could reduce many risks even while your business is just an idea or in the start-up phase.

Gather as much demographic information as you can, as discussed above, in order to understand the opportunities and limitations to attracting new customers.

Ask and answer these questions to get a sense of the market you are entering:

• Demand: Is there a need for your product or service?
• Market size: How many people would be interested in your service or product offering?
• Economic indicators: What is the income range, employment rate and availability of skills?
• Location: Where do your customers live? How do you get to these customers? Does your business require premises, or can services be provided remotely?
• Market saturation: How many similar options are already available to consumers?
• Pricing: What do potential customers pay for these products or services? What are your fixed and variable costs and what profits margins are needed to make the business viable?

It is also vital to analyze the competitive landscape. Important factors to consider include:

• Level of competition;
• Market share;
• Strengths and weaknesses, opportunities and threats (SWOT Analysis). A SWOT analysis is an essential step in this first phase, to assist you to uncover where your strengths (internal) and opportunities (external) lie, and to also uncover what threats (external) and weaknesses (internal) you may have that need to be overcome.
• The window of opportunity to enter the market;
• The importance of your target market to your competitors;
• Any barriers that may hinder you from entering the market;
• Indirect or secondary competitors who may impact your success.

2) Write your Business Plan

A business plan is the roadmap you develop. You need key targets and milestones, for how to structure, run and grow your new business. Your business plan is the foundation of your new business.

Business plans convince those working with you as well as financial institutions that investing in your business is a smart choice. Your business plan must be compelling and well thought through.

Be wary of trying to be overly ambitious. Your business plan should be based on real hard data and facts.

A good business plan will guide you through the stages of starting up, as well as managing the key elements of your business.

There is no right or wrong way to approach and write a business plan however, it is however important that the business plan meets your needs. Business plan templates and examples can be found on the internet, to guide you on what a good Business Plan should look like.

Preparing a Business Plan

The sections relevant to your business plan will depend on your business and its needs.

Some of the general sections that could be included are:

1. Executive summary

Briefly tell the reader what your company is and why it will be successful.

Include your vision and mission statement, your product or service, any USP’s you may have that set you apart from your competitors, and basic information about your company’s leadership team, employees, and location.

Remember to include financial information and high-level growth plans if you plan to ask for financing from financial institutions or investors.

2. Company description

The company description provides detailed information about your company. Be sure to add detail about the problems your business solves. Also list the consumers, organizations, or businesses your company plans to serve.

Explain the competitive advantages that will make your business a success (your USP). Are there experts on your team? Have you found the perfect location for your store?

Do you use technology to improve on systems and processes? Your company description is the place to boast about your strengths and what makes your business and/or product offering unique (your USP).

3. Market analysis

A good understanding of your industry outlook and target market is needed here. Market research will show you what other businesses are doing and what their strengths are. In your market research, look for trends and themes.

What do successful competitors do? Why does it work? Can you do it better? This is part of your SWOT Analysis.

4. Organization and Management

Tell your reader how your company will be structured and who will be managing it.

Describe the legal structure of your business. State whether you have or intend to trade as a Sole Proprietor, Private or Public Company.

Use an organizational chart to lay out who is in charge of what in your company. Show how each person's unique experience will contribute to the success of your business venture. Consider including resumes and CVs of key members of your team as well.

5. Service or Product line

Describe what you sell or what service you offer. Explain how it benefits your customers and what the product lifecycle looks like. Share your plans for intellectual property, like copyright or patent filings. If you're doing research and development for your service or product, explain this in detail

6. Marketing and Sales

There's no single way to approach a marketing strategy. Your strategy should evolve and change to fit your unique business needs.

This section should cover your overall Marketing plan and Sales Strategy and tactics to implement your strategy, describe how you'll attract and retain new customers, as well as how sales will happen, payment terms, special offers and discounts, loyalty programs, advertising strategy and costs, to name a few.

Doing another SWOT Analysis specifically for your Marketing and Sales Strategy will go a long way to assisting you to develop a good plan, taking into account your market research findings. You need to also include advertising and promotion methods and costs, product or service pricing strategy, projected sales, costs and profit margins, etc.

This section will be referred to when you make financial projections, therefore make sure to thoroughly describe your complete marketing and sales strategies.

Initially advertising and marketing costs will be high, as you need to invest in this key area in order to attract customers/customers to your business so you can start making money. This should be considered an investment in your business, rather than as a cost. Email marketing is an affordable way to reach your clients whether you sell products or services.

7. Business Funding request

This is where you outline the funding requirements and how much funding you’ll need over the next five years and what you'll use it for.

Specify whether you want debt or equity, the terms you'd like applied, and the length of time your request will cover. Give a detailed description of how you'll use your funds. Specify if you need funds to buy equipment or materials, pay salaries, or cover specific bills until revenue increases.

Always include a description of your future strategic financial plans, like paying off debt or selling your business. Consider the pros and cons on whether to purchase or rent tools and equipment.

8. Financial projections

Supplement your funding request with financial projections. Your goal is to convince the reader that your business is stable and will be a financial success.

If your business is already established, include income statements, balance sheets, and cash flow statements for the last 3 to 5 years. If you have other capital you could put against a loan, make sure to list it now.

Provide a prospective financial outlook for the next five years. Include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, be even more specific and use quarterly — or even monthly — projections. Make sure to clearly explain your projections and match them to your funding requests.

This is a great place to use graphs and charts to tell the financial story of your business.

9. Appendix

Use your appendix to provide supporting documents or other materials that were specially requested. Common items to include are credit histories, resumes, product pictures, letters of reference, licenses, permits, or patents, legal documents and other relevant contracts.

3) Business Funding

Your business plan will indicate how much money you’ll need to start your business as well as expected costs, sales and profit for the next 5 years (3 years is normally a more realistic timeframe). If you don’t have the capital required, you’ll need to either raise or borrow the capital. Fortunately, there are many ways to raise funding for example:

• Self-funding
• Investors
• Loans
• Business partner

4) Choose your Business Location

Choosing a business location is one of the most important decisions you will make. Whether your business has a premises or online store, office or factory workers, or a virtual remote work business, the choices you make will affect your taxes, revenue and legal requirements.

It is worthy of noting that with the start of the Covid-19 Pandemic, there has been a need for a major shift in thinking on how to sustain and grow a business in such adverse circumstances.

Those business that adapted (and were fortunate or creative enough to adapt), and rethought their business model and strategy, have in the most part weathered this pandemic well. Those businesses who were cloud based, or moved to cloud-based, were also in the whole able to weather the pandemic. So strong consideration needs to be given on how you can use technology to support and enhance your business plan, improve efficiencies, lower costs for you and your customers. 

Location depends in part on the location of your target market, business partners, and your personal preferences. In addition, you should consider the costs, benefits, and restrictions of different government agencies. New business need to minimize their fixed costs and overheads as much as possible, to help maximize profit, especially in the early phases of you business when your advertising and marketing costs are high.

Also consider the following:

• Region-specific business expenses

When you calculate your startup costs, take into account the different expenses and what they might cost more or less depending on your location. Costs that can vary significantly by location include standard salaries, minimum wage laws, property values, rental rates, business insurance rates, utilities, and government licenses and fees.

• Local zoning laws

If you buy, rent, build, or plan to work out of a physical property for your business, make sure it conforms to local zoning requirements.

• Location, location, location
• Taxes

Consider the tax landscape. Income tax, sales tax, property tax, and corporate taxes can vary significantly from entity to entity. In fact, SARS has created tax structures that favour certain kinds of companies.

• Government incentives

Government offers special incentives for small businesses. You might also find small business loans or other financial incentives.

Incentive programs and benefits are often related to job creation, energy efficiency, urban development, and technology.

5) Choose a business structure

The legal structure you choose for your business will impact your business registration requirements, how much you pay in taxes, and your personal liability.

Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. 

You'll need to choose a business structure before you register your business with the state. Most businesses will also need to get a tax reference number and file for the appropriate tax returns.

Choose carefully. While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications. 

Consulting with business counselors, attorneys, and accountants can prove helpful.

Common types of business:

- Sole proprietor

A sole proprietor is easy to form and gives you complete control of your business. 

You're automatically considered to be a sole proprietor if you do business activities and don't register as any other kind of business. 

Sole proprietor's do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. 

You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can't sell stock, and banks are hesitant to lend to sole proprietor.

Sole proprietor can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.

- Partnership

Partnerships are the simplest structure. Two or more people can own a business together (up to a maximum of 10 partners)

Partnerships can be a good choice for businesses with multiple owners. Professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.

- Private Company

A private company is a limited liability entity type. The shareholders can only ever be liable for the interest they hold in the entity.

- Public Company

The companies can raise capital by offering shares to the public or on a stock exchange. Capital can be raised easily this way however ownership is diluted by additional shareholders who buy in to the organisation.

- Nonprofit organisation

Nonprofit organisation are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don't pay income tax on any profits.

- Cooperative

A cooperative is a business or organization that is owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

Compare the different business structures

Compare the general traits of these business structures, but remember that ownership rules, liability, taxes, and filing requirements for each business structure can vary. We highly recommend that you appoint a registered Accountant and Tax Practitioner to advise you on the different options and decisions you need to make, as best suited to your business model. This can save you a lot of money in the long run.

6) Choose your business name

It’s not easy to pick the perfect name. You’ll want one that reflects your brand and captures your spirit. You’ll also want to make sure your business name isn’t already being used by someone else.

• Register your business name to protect it

You’ll want to choose a business name that reflects your brand identity and doesn’t clash with the types of goods and services you offer.

• Once you settle on a name you like, you need to protect it. There are four different ways to register your business name. Each way of registering your name serves a different purpose, and some may be legally required depending on your business structure and location.
• Entity name protects you on a National level
• Trademark protects you on Legal level
• Trading as name doesn’t give legal protection, but might be legally required
• Domain name protects your business website address from being used by someone else

Each of these name registrations are legally independent. Most small businesses try to use the same name for each kind of registration, but you’re not normally required to.

7) Register your Business

Once you’ve picked the perfect business name, you’ll need to make it legal and protect your brand. If you’re doing business under a name different than your own, you’ll need to register with the Companies Intellectual Property Commission.

Register with government agencies

Typically, you would need to register with government departments which would include amongst others:

• South African Revenue Service
• Department of Labour

Stay up to date with compliance requirements

Some agencies require you to provide reports soon after registering depending on your business structure.

You may need to file additional documentation with the SARS and/or CIPC. These filings are typically referred to as CIPC Reports or SARS registration, and most often need to be filed within 30-90 days after you register. 

8) Get CIPC Registration Documents and SARS Registration documents

You’ll use your company registration number for important steps to start and grow your business, like opening a bank account and paying taxes. It’s like an identity number for your business. SARS also requires a business to have an income tax number and VAT, PAYE, SDL and UIF numbers if these are relevant.

9)  Apply for Business Licenses and Permits

It is vital to keep your business running smoothly by staying legally compliant. The licenses and permits you need for your business will vary by industry, location, and other factors.

10) Open a Business Bank Account

A small business cheque account can help you handle legal, tax, and day-to-day issues. The good news is it’s easy to set one up if you have the right registrations and paperwork ready.

Benefits of opening a business bank account

As soon as you start accepting or spending money as your business, you should open a business bank account. Common business accounts include a cheque account, savings account, credit card account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.

You can open a business bank account once you have received your company registration documents. 

Business bank accounts can offer perks that don't come with a personal bank account, for example:

• Protection. Business banking offers limited personal liability protection by keeping your business funds separate from your personal funds. Merchant services also offer purchase protection for your customers and ensures that their personal information is secure. 
• Professionalism. Customers will be able to pay you with credit cards instead of directly to you. Plus, you'll be able to authorize senior employees to handle the day-to-day banking tasks on behalf of the business.
• Preparedness. Business banking can also come with the option for a line of credit for the company. When you have emergencies, this can be used. Or if your business needs new equipment or working capital (day to day) requirements of the business.
• Purchasing power. Credit card accounts can help your business cover large startup purchases and help establish a credit history for your business. A good credit record is needed to obtain credit and the only way to get a good credit record is to have an account that can be analyzed to give you a credit rating. 

Find a bank account with low fees and great benefits

Some business owners open a business account at the same bank they use for their personal accounts. Rates, fees, and options vary from bank to bank, so you should shop around to make sure you find the lowest fees and the best benefits possible.

Here are things to consider when you're opening a business cheque or savings account:

• New account offers
• Interest rates for savings and cheque accounts
• Interest rates on credit
• Transaction fees
• Early termination fees
• Minimum account balance fees

Get the documents ready that you need to open a new business bank account

To open a business bank account is easy once you've picked your bank. Simply go online or to a local branch to begin the process. Here are some of the most common documents banks ask for when you open a business bank account. Some banks may ask for more:

• Certified Identity documents of the Directors
• Your company’s registration documents
• Ownership agreements
• Proof of address of the Directors

Remember your documents should not be older than 3 months including any certified copies of identity documents.

In addition to all of the above, if you are planning on hiring employees, you need to have in place all your essential HR Policies and Processes, contracts of employment (open ended, fixed term, seasonal, independent contractors), salary and benefits offers, organograms, job profiles, performance management, recognition and reward systems, and so on.

We advise to appoint an HR consultant with the necessary skills and experience to assist you to set this all up, aligned to your business needs, and to ensure your HR policies and practices are all aligned to the applicable labour legislation. Not doing so could be a costly mistake.

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