Gurmeet S Arora


         Chartered Professional Accountant


Frequently Asked Questions: Small Business








































































How do I know whether I have what it takes to run my own business?


Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.


When determining what business is "right for you," consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you're willing to make to run a business.


Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?




What should I include in a business plan?


The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:

• Introduction
• Marketing
• Financial Management
• Operations
• Cash Flow Statement



Q: What should be included in the introduction to my business plan?

A: The introductory section of a business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.


Q: What should be included in the marketing section of my business plan?

A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.


Q: What should be included in the financial management section of my business plan?
A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.


Q: What should be included in the operations section of my business plan?
A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.


Q: What should be included in the concluding statement of my business plan?
A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also be specific as to how you plan to achieve your goals.




Is a home based business right for me?


To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work.
You have to be willing to plan ahead, then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.




What steps can I take to improve my business cash flow?


To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

  • Collecting receivables: Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
  • Tightening credit requirements: As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
  • Manipulating price of products: Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
  • Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
  • Increasing your sales: Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.




Should I keep a cash reserve in my small business?


You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.




As a small employer, what do I need to know about employee benefits?


The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Canada Pension Plan, unemployment insurance, and workers' compensation. Funding for the Canada Pension Plan comes from payments by employers, employees and self-employed persons into a fund that provides income during retirement years.


Full retirement benefits normally become available at age 65. Other aspects of Canada Pension Plan deal with survivor, dependent and disability benefits.  Unemployment insurance benefits are payable as regulations.

Employer payments, based on total payroll, contribute to the program. Workers' compensation provides benefits to workers disabled by occupational illness or injury. Each province mandates coverage and provides benefits.  Coverage of owners and executives is optional. Employers are required to pay for statutory holidays and vacations as mandated by employment Act.


Optional Benefits:
A comprehensive benefit plan can include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and leave. A benefit plan can also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.




What kind of records do I need to keep in my business?


Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that help you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.


Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the CRA.


To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied-up in inventory. They should reveal which of your product lines, departments, or service are making a profit, as well as your gross and net profit.


The Basic Recordkeeping System
A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.
Our office can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.




How can I ensure that I am choosing the right computer system?


To computerize your business you will have to choose the right programs, select the right equipment and implement the various applications. System software generally comes with the computer and must be loaded into memory before the application software can work.


In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware.


To determine your requirements, prepare a list of all functions in your business in which speed and accuracy are needed for handling volumes of information. These are called applications.  For each of these applications make a list of all reports that are currently produced. You should also include any preprinted forms such as checks, billing statements or vouchers. If such forms don't exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information you want displayed on the computer video screen (CRT).


Again, design a hand-drawn version. List the circumstances under which you want this information displayed. For each application make a list of all materials used as input into your manual system. These may include items such as time cards, work orders, receipts, etc. Describe the time period in which these items are created, who creates them and how they get into the system. Also, describe the maximum and average expected number of these items generated in the appropriate time period.


For all files you are keeping manually or expect to computerize list the maximum and average expected number of entries in a specific time period. Identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business.




How can I successfully implement a new computer system?


When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes.


Be sure the location for your new computer meets the system's requirements for temperature, humidity and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and convert them one at a time rather than all at once. And, train, or have the suppliers train, everyone who will be using the system.
After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works.


System Security
If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software.


Data Safety
The best and cheapest insurance against lost data is to back-up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs and documents needed for essential tasks during recovery from a disaster.

Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.




How can I ensure that my small business will survive the transition into the next generation?


A large portion of family businesses do not survive the transition from first to second generation. Of those that do, about half do not survive the transition from second to third generation. Owners are always in dilemma with what to do with their businesses; however, the options are few.


The following is a list of options to consider:

  • Close the doors.
  • Sell to an outsider or employee.
  • Retain ownership but hire outside management.
  • Retain family ownership and management control.


There are four basic reasons why family firms fail to transfer the business successfully:

  • Lack of viability of the business.
  • Lack of planning.
  • Little desire on the owner's part to transfer the firm.
  • Reluctance of offspring to join the firm.


The business succession fails due to lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.




What's involved with succession planning for family business?


Transferring the family business requires the family to make a determined effort to do the following:


  • Create a business strategic plan.
  • Create a family strategic plan.
  • Prepare an Estate Plan.
  • Prepare a Succession Plan, including arranging for successor training and setting a retirement date.


These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.


Q: What is a business strategic plan?
A: A strategic plan for the business will allow each generation an opportunity to chart a course for the business. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. This plan is long term in nature and focuses on where you want the business to be at some future date.


Q: What is a family strategic plan?
A: The family strategic plan is needed to maintain a healthy, viable business. It establishes policies for the family's role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business.  The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.


Q: What is an estate plan?
A: An estate plan is critical for the family and the business. Without it, you will pay higher taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.


Q: What is a succession plan?
A: A succession plan will ease the current generation's concerns about transferring the business. It outlines how succession will occur and how to know when the successor is ready.