Operating covers the process of delivering your product or service, as well as the financials and bookkeeping which underpin it.
Delivering Your Product or Service
Depending on whether your business provides a product or a service, the process of execution may vary.
The Lifecycle of Providing a Product
When dealing with a product (i.e. an article or substance that is manufactured or refined for sale), there are a number of steps which lead to sale and use by the consumer. An example lifecycle is shown in the exhibit.
There may be regulations around what information must (or must not) be provided to the public when you are marketing your product. For example, food products must provide certain information (e.g. country of origin, food allergies, ingredients list) listed in a standardised manner on the product, as required by Food Standards Australia New Zealand.
Other regulatory requirements depending on your industry may include:
- Product labelling, such as weight, based on the Competition and Consumer Act 2010 (see the Australian government business resources on labelling).
- Fair trading rules, such as pricing regulation, based on the Competition and Consumer Act 2010 (see the Australian Competition & Consumer Commission website on setting prices).
- Advertising rules, such as use of the word "free", based on Australian Consumer Law - part of the Competition and Consumer Act 2010 (see the Australian Competition & Consumer Commission publication on advertising and selling).
In reality, creating and selling a product is as simple as it sounds. The only catch is that you must be aware of, and comply with, regulations relevant to your product. Being aware of relevant restrictions is the hard part. Talking to those already producing a similar product is a great way to understand your obligations.
The Lifecycle of Providing a Service
Providing a service (i.e. the action of helping or doing work for someone) is slightly different, in that it requires a skill which others can't (or won't) acquire or execute themselves. An example of a service is a car wash, which requires work by an individual and isn't manufactured and sold en masse.
In starting a service-based business, you must have satisfactory skills in whatever industry you are serving. For example, if you are a photographer you should already have a baseline level of ability before you commence charging for that service.
Payment for the service may occur before or after the service has taken place, and is usually by negotiation. Being clear on the fees and terms (i.e. what's due when) is critical when charging for a service. In terms of pricing, there are two common methods of charging for a service:
- Fixed price, where a task or service is completed at a fixed rate to the customer (usually agreed in advance).
- Time and rate, where time taken to complete the task or service is multiplied by a standard rate.
Some services are defined as professions, those that involve prolonged training and a formal qualification. Examples of professions include law, engineering and medicine (each being semi-self governed by institutions made up of professionals, such as Engineers Australia). It's critical to understand requirements which may exist to allow you to provide your service. These may include professional development programs, training or registration. Finding the union or body for your service industry is a good place to start.
There are several mediums in which you can market your product or service:
- Social media (e.g. through organic social media streams, or through their paid equivalents such as Facebook Business or Instagram for Business).
- Website advertising (e.g. through Google AdWords).
- Word of mouth.
- Flyers and print media (e.g. printed by Vistaprint).
Executing effective marketing to generate revenue from your product or service can be distilled into four fundamentals:
- Targeting: Have you identified exactly who you are selling your product or service to (e.g. 23 year old female university student, interested in high fashion)?
- Offering: Do you have a factor which will differentiate your offering from others, and is this differentiator something that will actually change your target's mind (e.g. placement in the right shop, noticeably higher quality where quality matters)?
- Price point: Is the product or service below the willingness to pay for your target market?
- Communication: Are you marketing your product or service differentiation where your target market spends their time, how are you communicating it to them?
With respect to price point, most people would adopt the model of working out the costs to render a product or service, adding a margin for profit and ending up with the price to be paid. This is cost-based pricing.
In reality, the consumer doesn't care how much it costs to render your product or service, they only care what financial value it has in society (i.e. what they "expect" to pay for such a product or service). This value they "expect" to pay is termed their willingness to pay. Matching your price point to the consumer's willingness to pay is called price-based pricing. An example of this pricing strategy is shown in the exhibit.
Invoicing and Expensing
Critical to making any business operational is the process of invoicing and taking payment from the customer. This may be in the form of an "invoice" or a "receipt", which are typically used interchangeably. An invoice may be described to be a "tax invoice" if you are registered for GST. You must produce a tax invoice within 28 days if requested by the consumer.
Invoices (both tax regular) show seven or eight pieces of information, depending on the value (read more at the Australian government business website):
- Notification that the document is an invoice (or tax invoice, if applicable).
- The seller's identity.
- The seller's ABN.
- The date the invoice was issued.
- A brief description of the items sold, including the quantity (if applicable) and the price.
- The GST amount (if any) payable.
- The extent to which each sale on the invoice is a taxable sale (i.e. the extent to which each sale includes GST).
- The buyer's identity, if the sale is over $1,000 (including GST).
A real-life example of an invoice (not a "tax invoice") can be accessed using the button below. This invoice was created in Microsoft Word, but other services (e.g. Xero) can automatically generate invoices. For businesses with few invoices, manually creating invoices offers more control and customisation.
While not as exciting as invoicing, expensing is equally as important in running a profitable business. Acquiring services or materials is mostly identical to "shopping" in the retail world - you'll view the offerings of several providers of the product/service and choose the one which suits your needs best.
If you are hiring contractors to work with you, they'll provide you with invoices of their own which you pay as with any other service provider.
The golden rule when it comes to expensing is keep every invoice, and don't destroy anything for 7 years. Scanning and filing invoices on a cloud platform (e.g. Dropbox) is an efficient solution, removing the need for paper copies.
An element of expensing is actually "procurement", a fancy word which describes the process of finding, agreeing terms and acquiring goods/services from an external provider. In small business, you will usually be treated as a retail consumer (i.e. as if you would if you were just a normal person, and not a business). However, when you are procuring a good/service from another small business, it pays to remember that everything in life is negotiable, including prices.
Bookkeeping is the process of filing all outgoing invoices (i.e. when people are paying you) and all incoming invoices (i.e. when you are paying others). This is extremely important as it allows you to complete your tax return, or have a tax agent complete it on your behalf.
Bookkeeping also allows you to track your operating profit (the amount of money you made from operations, which excludes capital expenses for major works or items [e.g. a car] which are recorded separately). A simple financial spreadsheet (from Chapter 2) can be accessed using the button below.
If you employ others you'll need to keep on top of pay as you go (PAYG) tax, superannuation disbursements and payroll as well as your company invoices and expenses. Read the Australian government's business website to understand your obligations when employing others.
There are a number of obligations as a business owner at the end of each financial year (June 30). Depending on your situation, some or all of the below may apply (this list may not be comprehensive for you):
- Summarising income and expenses in a profit and loss statement.
- Conducting a stocktake.
- Summarising your record of debtors and creditors.
- Collating records of asset purchases or expenditure on improvements to assets to calculate depreciation expenses and capital gains.
- Completing and lodging your income tax returns.
- Lodging yearly reports or returns for PAYG withholding, fringe benefits tax (FBT), Goods and Services Tax (GST), and the taxable payments reporting system.
- Meeting superannuation requirements (through SuperStream, the government system for managing superannuation).
You can learn more about your obligations at the Australian government's business website. It is wise to use an accountant to provide you with advice and services to do with tax returns and accounting - while it may cost more than doing it yourself, this will be the best money you ever spend.
Now your business has day-to-day operations under control. We'll cover how to build a brand in the next chapter.