At McDonald’s…

Wouldn’t it be great if your small business…

• Worked without you. Only if your business can work without you will it have any great capital or sale value.

• Delivered its product or service consistently time and time again to the customer.

• The employees did it the same way every time, the best way.

If we’re going to learn from the small businesses that successfully do this, let’s take a look at the most successful small business in the world, McDonalds. Even if you don’t like what McDonald’s sell, there is no denying it is a hugely successful business.

At McDonald’s…

• The owners don’t work in the business flipping burgers.

• You know when you go you’re going to get the same consistent burger every time, with the same customer experience every single time, which is why people go there. They give the customer exactly what they are expecting every single time, there is no disappointment and so the customers return.

Similarly, if you went to a printer and got a great print job done the first time but the next time there were a few mistakes, you’d be far less inclined to return again. How comes it was perfect one time and not another? That doesn’t happen at McDonalds. What’s more, they manage to do it at thousands of their restaurants all over the planet.

• The burgers are the best tasting burgers made the same way every single time. They’ve found their best formula and they use it consistently, only changing it when they find an even better formula. And that is true for every part of the McDonalds experience from the food, to the greeting, to the cleanliness, to the kids packs, etc. Everything works and is done the same way until they find a better way to do it.

It doesn’t matter who does a task, they always follow a system, so that it’s then done the same way every single time and the customer gets the same experience every time they go back.

When one-person leaves and another joins, how comes it still gets done exactly the same way.

Although McDonald’s is a seemingly low quality product, it is an extremely high quality business which customers value and have great loyalty to.

McDonald’s has the entrepreneurs with the vision to move the business forward, the managers who manage the units and the technicians who work in the units and they all work together in harmony.

Of course, it’s because they have an organisational strategy, a management strategy and a system for everything they do. It is the ultimate systematized business that runs just like clockwork.

Just because your business isn’t McDonalds doesn’t mean you can’t learn from them. It is what is known as a Business Format Franchise.  This is the type of franchise operated throughout the world by many other businesses and it’s no surprise that franchises are far more likely to succeed than any other start up business.

When a McDonalds franchise is taken, the franchisee gets far more than a brand name. They get a whole way of doing things that work and not until they have learnt the way things are done, do they get the keys to the door.

Just because you are not going to franchise your business doesn’t mean you can’t learn from how they make everything inside the business consistently happen. If that happened just inside your one business unit, without you working in it, wouldn’t your business be a great place to go to work, or not work if you so chose.

When Ray Croc took the McDonald brothers burger business in 1954 and set about figuring out how he could make it work, he set about working on the business and not in the business. The business became the product to him, not the burgers and it was the business he worked on.

The key is to work ON, not IN the business. If you are a one-man business, not wanting to grow, this perhaps isn’t true to the same extent, although certain things can still be learnt from it about ensuring you deliver consistency to your customers. A one-man operation may not really have a business; they have a job, possibly a well paid one, with customers as their boss. This doesn’t mean there is anything wrong with the one-man operation. The world is reliant on many one-man operations, it’s just that some of these principles apply less to them.

For every other small business that wants to develop, you’ll only do so if you get to work on your business and stop working in it. As an extreme, you can imagine that you are going to make another 1000 just like it. What would you have to do to achieve this? You would have to completely systematize your business.

An analogy that can help with the understanding of working on, rather than in your business, is a game of monopoly. If you are the hat in the game, you are simply a piece in the game and you don’t make the decisions, you can’t influence the game at all. However, by being a player in the game and being able to see the whole board, you can start to put strategies into place that will have far more of an influence. You are now working on the game rather than being in it. It’s exactly the same for your business, you can have far more effect by working on it.

Before we get carried away, a word of warning. Some small businesses have tried to systematize their business and got so carried away with it that they spent all their time doing just that and failed almost before they got going. Some people believe the E-Myth book sets a standard that most people cannot hope to meet. Common sense is the operative word and the E-Myth is a must read book for every entrepreneur.

You have to operate and generate enough income to put food on the table, pay the mortgage, etc. This has to be the first priority. After that, look to work on the systems for your business that will …

• Give consistency to everyone – your customers, suppliers, and employees.

• Be operated by people with the lowest possible skill level. This enables you to find staff when you need them at the lowest possible price. You don’t want systems that can be operated by only high quality people, because when that person leaves, you will have trouble getting a replacement.

Sure, you say McDonalds is not like your business. So let’s take a far more complicated business such as a firm of solicitors. If a firm of solicitors was to employ only the brightest legal brains it would be extremely difficult to consistently offer their level of legal knowledge, as it becomes very difficult to find a replacement should they leave, be ill, etc.  However, if they were to develop services that could be provided by anyone with an average legal brain, they would be able to grow and leverage the business far more.

• Enable you to eventually not work in the business at all.

Even if you just focus on the most critical things you do in your business and systematize these, your business will be far better for it.

So what you need is a systems dependant rather than a people dependant business. The systems run the business and the people run the systems. You can’t do without people, but the more you systematize, the less dependant you become on people.

Organisational Strategy

If you are going to develop a business that is not people dependant, you need to have an organisational chart that starts not with peoples names on it but with the positions that need filling.

It helps to draw an organisation chart based on what you want your business to look like rather than how it is at present.

The positions on the chart should relate to employee functions (managing director, sales director, accounts, etc) rather than named people. This ensures it’s the system that you’re concentrating on.

Once you’ve decided the functions you need in each box, then you can allocate people to fit those functions.

Let’s say there are three owners of the business but there is only one position for managing director. Instead of having 3 people all trying to be the managing director that creates conflict, duplication of resources and nobody knowing what their responsibilities are, you agree who is likely to be best suited to that position and put them into it. The other two, take other positions. They still all own the business equally but now they are starting to organise the business far more effectively.

To start with, you may be the only one in the business. That doesn’t matter – just put your name in each box. As the business grows you move out of some boxes and get other people to move into the box. However, in the box will be a system for them to follow so that they do it the same as you. Now you’re starting to build a business that works.

Look at each position in the chart and outline what is expected of each position. In the most profitable businesses, people know what is expected of them.

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Lots of people dream of having their own small business. Why work for someone else when there is less job security and they are expecting more and more work from you?

However it is overlooked that to run a successful business, especially in the early years you need…

• Motivation
• Focus
• Capacity to work hard
• Self –reliance
• Support of your family
• A skill or a good product.

Starting your own business takes determination, perseverance and self-discipline. Beware if you are starting for negative reasons, perhaps just because you dislike your boss or you like drinking in pubs and so thought it would be great to run a pub. Running your own business is a big step. Take time to consider and plan.

It’s not playing golf when you want and taking holidays when you want. There can be a lot of admin and red tape to deal with. The customer becomes your boss and they pay your wages.

Of all the tens of thousands of people who still start a business of some sort…

• By the end of the first year, 40% will have failed.

• Within 3 years, 56% will have failed.

• Within 5 years, 76% will have failed.

Of those who go past 5 years, there’s no guarantee they will survive the next 5 years.

So what are the common problems suffered by small businesses…

• The owners work too hard and for too many hours.

• Personal objectives of the owners such as hobbies and spending time with their family end up low down on the list of priorities.

• The owners spend too much time doing the day-to-day technical work rather than planning and managing the business.

• The owners don’t know where their business is going.

• The owners don’t understand that in order for a business to have a good sale value it must work without them.

• Many owners get frustrated and simply give up and go back to being an employee.

• The rewards don’t match the effort.

They often face common problems in managing their business…

• No consistency in delivery of their product.

• Can’t depend on their employees to get it right.

• They focus on people rather than systems, which creates problems when the people leave.

• Systems that are in place are not documented but in the head of the person who leaves.

• The owner ends up doing everything.

• Employees are not as diligent as the owners.

• The owner spends too much time filled up with other people’s problems and administration.

• The owner always has to supervise and guide employees.

• They have no idea how they compare with other similar businesses and competitors with respect to financial performance or non-financial areas such as human recourses, production, marketing, etc. They therefore don’t know where there are areas for improvement.

With regards to marketing these are common problems for small businesses…

• It’s done ad hoc rather than in a systematised way.

• They don’t know what works.

• They don’t fully understand why their customers buy.

• They don’t know who their most profitable customers are.

• They don’t measure their marketing results against costs.

• They take on customers they later regret dealing with.

• Bad debt problems.

Then there are the dreaded financial problems…

• Relying on short-term overdrafts to try to support long-term growth.

• Over relying on the bank due to over trading.

• No system for projecting income and expenditure.

• No system for measuring key financial indicators against their plan.

• Accounts are not useful to the business.

• Accounts are not produced quickly enough.

We are Accountants in Mitcham, Accountants in Wimbledon, Accountants in Putney, Accountants in Southfields, Accountants in Balham and Accountants in Wandsworth.

A significant task for the new business owner is ensuring that the business is properly complying with the extensive tax and information filing requirements imposed by the various authorities. Problems and penalties could arise if the new business is not registered with the appropriate tax authorities in a timely fashion. While this post is not intended to be an all-inclusive list of filing requirements, it summarises some of the more prominent requirements common to most businesses.

HM Revenue & Customs It is necessary to notify HM Revenue & Customs of your existence by completing forms CT41G (companies) or CWF1 (sole traders/ partnerships). The form notifies HM Revenue & Customs of your accounting date, your accountant, and also enables a PAYE (Pay As You Earn Scheme) to be set up, which is a requirement if you are to be an employer. If you fail to register within the first three full months of commencing business a penalty of £100 may be levied.

H M Revenue & Customs – NI Contributions Office

Depending on the level of profit, sole traders and partners have a liability to Class 2 NIC, and these are payable either quarterly or monthly by direct debit. Class 2 contributions are at a weekly level of £2.40 (where annual earnings are £5,075 or more for 2010/11) and the necessary form to collect Class 2 contributions should be completed at the same time as the form CWF1. Leaflet CA02 ‘National Insurance contributions for self-employed people with small earnings’ gives full details and an application form for exemption from liability.

H M Revenue & Customs – VAT

You need to consider if it is beneficial to be VAT registered from the outset. If you are registering for VAT, form VAT 1 needs completing, and if you are a partnership, form VAT 2 needs to be completed, in addition to the VAT 1, giving details of all the partners. Alternatively, an online registration process is available on HMRC’s website. If turnover exceeds the compulsory registration limit, £70,000 at 1 April 2010, in any period of 12 months or less Customs must be notified within 30 days of the end of the month in which the threshold was exceeded.

Starting your business as a self employed person is both an exciting and a challenging prospect. One key area you need to ensure is to register as self employed with taxman (HMRC). This post explains how you do this and time limits for you to register.

Time Limits

For National Insurance purposes make sure you are registered within three months from the end of the month in which became self employed. If you do not get around doing this it will result in £100 fine. Further, you will need to make payments of £2.40 per week for Class 2 National Insurance contributions. However, if your earnings are below the small earnings exception level – £5,075 for tax year 2009/10, you are not required to make any Class 2 National Insurance contributions.

How to Register

You have the following options to register:

• Call the Self Employed Registration Helpline on 0845 915 4515 or
• Completing CWF1 or mailing it to HMRC or
• Registering online via the government gateway portal on www.hmrc.gov.uk.

Whichever method you choose to register you will need to provide the following information: full name, address, post code, date of birth, national insurance number and, if you decide to pay your Class 2 National Insurance through a standing order – your bank details.

Joint Notification

Once you have registered, this will act as joint notification of tax and national insurance. You will receive a 10 digit Unique Taxpayer Reference (UTR) and a blank tax return for you to complete for the year 2009/10.

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This is the third and the final blog on business structure that would be suitable for you. The first blog in the this series covered limited companies and the second blog covered partnerships.

Sole trader is the simplest form of business to start where you carry on business on your own account. You are liable to income tax and Class 4 National Insurance on your profits. You can employ people including your spouse for work done.

Your business format is not set in stone forever and you can change between them. It is fairly simple for a sole trader to take on a partner and become a partnership and for a partnership to become a Limited Company. There are however more complications with changing from a Limited Company to a sole trader or partnership.

As a Free Index Finance and Accounting Expert I respond to tax questions on FreeIndex.

One of these question was about records that a cash based busines needs to keep for tax purposes. Here is the link that provides this information http://www.freeindex.co.uk/business-advice/what-documentation-to-keep-for-your-tax-return_1144.htm