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The Team at NOW bring you topics of interest to owners of small businesses. Please feel free to leave a comment or let us know if there are particular topics you'd like us to cover.

Sell For Success 4 - the 4 No's

The Team - Thursday, April 12, 2012

This is the fourth and last in our series of articles on successful selling. When I first started out in business I was taught that there are four reasons that prospects don't buy from you. They are:

No Trust - they don't know you, don't trust you and don't want to deal with you. When you get an unwanted call in the evening and they say they are in your country and the telephone display shows 'overseas' then there is no trust and you hang up.

If you are starting up in business then perhaps you have some expertise. Your prospects may not know this unless you tell them, not by being boastful but also not by hiding your experience. Think about how you develop a feeling of trust with your potential customers, through your branding, customer service, image, history, easy access and communication.

No Need - they have sufficient trust to be prepared to listen to you but they weren't awake in the middle of the night wanting what you have to offer. However, many can be convinced and this is where knowledge of potential pain is required.

No Help - now they want what you are offering but they are not convinced that you are the one to buy from. They want to check competitors, websites, etc. When you can match your benefits to their pain, you can demonstrate that you are the salesperson who will help them.

No Hurry - they have decided that they need what you have to offer and that you will be the person that they will buy from. One day! Maybe soon! Maybe not so soon! A lot of sales are nearly made but linger on at this point without going ahead. Think laterally about how to overcome this because it can sometimes be the hardest obstacle of all. Discounts are commonly used, although not my preference. Imminent price rises are good if they are true (you will lose trust if they aren't real). Generally people don't like being squeezed into making a decision and sometimes giving prospects a bit of space and then following up promptly can be a good strategy. It alway surprises me how few salespeople follow up.

Happy selling.

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Sell For Success 3

The Team - Tuesday, February 28, 2012

The Elevator Pitch

You've probably heard the term "elevator pitch." As if you were travelling in an elevator, this is the pitch you make in the few moments you have to say something that sparks the listener's interest in your business. If your pitch is effective the listener will be sufficiently intrigued to ask you to elaborate. And who knows, this person could be your next best customer!

What Do You Say After You Say Hello

Think about what you say when you meet people at a function and they ask ‘what do you do?’. Does your response invite them to engage in more questions or do they move on to the canapes? 

My elevator pitch for NOW Business Mastery might be:

"I make businesses three to five times more valuable than they would otherwise be."

That's it. Short and sharp! If a person is a prospect they will say something like 'Really - how do you do that?'

Then I could follow up with 'lots of ways - depends on the company - where do you think the value lies in your business'.

In different circumstances I might say:

●      We help get systems in place so things don't fall through the cracks;

●      We take businesses on a proven ABCDE pathway to growth;

●      Accountants will tell you that a business is valued at about three times EBIT but if you know how then it can sell for many times that;

●      Our clients are helped through succession issues; and

●      We help find growth capital.

The next blog will look at hurdles that a salesperson must overcome.

Happy Selling!

Bob Cross

Comments
Andy Buchanan-Hughes commented on 29-Feb-2012 04:05 PM
Best elevator pitch I ever heard was from someone in the financial planning business. He told people when asked what he did, he replyed I'm a millionaire trainer.
Jon commented on 04-Mar-2012 12:52 PM
Thanks Andy, that pitch is certainly short and sweet and gets straight to what he is offering as a benefit. Makes you want to ask more. Jon

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Sell For Success 2

The Team - Tuesday, February 14, 2012

Sell for success 2

This is the second of four blogs on selling. There is a science to selling - let’s talk about important steps in successfully obtaining sales.

Some preparatory work is required before you start talking to people.

Brainstorm a list of all the "pain" that people in your market experience. (If you don't know you shouldn't be operating in this niche!).

Then, list the features of your product or service. Features are the capabilities / specifications that make yours a good product or service. With this list, construct a table with the following headings:

Feature                          Benefit                                     Evidence (How)

For each feature, add “and this means that . . .” to determine a benefit. How will it reduce pain and make life better for the people who may buy your product or service?

For each benefit, add “how we do this is . . . ”. This is evidence that the benefits claimed are real.

For example, if a web developer were to do the exercise, they may produce the following features in a brainstorming session: great design and content; Search Engine Optimisation; robust development; and a good price.

Here is a table that could be developed from these benefits:

Feature

Benefit

Evidence

Great Design and Content

People will stay longer and probably buy from you

Pictures of sites that have been developed; testimonials

SEO

People will find to your site

List of previous customers that rank high on a search

Robust Development

Site will continue to operate under adverse conditions

Qualifications on sales material; testimonials

Good Price

The site is affordable and good value for money – the decision maker won’t feel ‘ripped off’

Preparedness to do a fixed price development; testimonials

When your salesperson is talking to a prospect, knowledge of the pain that prospects may be experiencing and the benefits that you can provide is invaluable.

The salesperson’s task is to bring to the surface the pain experienced by each prospect - to make them realise how bad their life has become. Note that different prospects will have different pain.

When, and only when, the prospect desperately needs the pain to disappear, the salesperson can offer relief by showing the specific benefits that will relieve the pain. This is the heart of making a sale.

The next blog will look at an important method for getting more prospects.

Happy Selling!

Bob Cross

Comments
logo designer commented on 24-Feb-2012 12:49 AM
Thanks for publishing these details on your site.

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Sell for Success 1

The Team - Tuesday, February 07, 2012

DON'T FORGET TO SELL

Today there is a lot of emphasis on marketing, particularly on web marketing, with an expectation of being able to convert sales without a face-to-face meeting with a prospect. Marketing alone rarely converts prospects into customers and business owners have to remember to "sell". This is the first of four blogs on selling.

Marketing brings income into an organisation by convincing people to buy your product or service. Marketing should develop awareness, trust and desire. Conversion or selling creates action. Aspects of marketing include:

  • Branding;
  • Market research;
  • Advertising;
  • Direct marketing (inc. web and social media);
  • Public relations;
  • Workshops and articles; and
  • Selling.

All of these except the last normally involve pitching to a very wide audience in the expectation that a percentage will gain an interest and will take action to buy. In practice, the percentage that takes action is a very small percent of the market addressed.

INCREASE YOUR SUCCESS RATE

Selling – face-to-face or over the telephone – brings a human face to the process and a high conversion rate from interest to order should be achieved. A good salesperson raises interest and then helps the prospect over hurdles far more effectively than other marketing processes.

If your organisation raises interest but you would wish for a higher conversion rate into a sale, maybe you need a dedicated professional sales person or if you are a small organisation, dedicate some time each week to focus on converting prospects to customers. Methods other than selling provide useful support for your sales people. Other marketing methods help to prepare a prospect to buy – a salesperson solves their real issues and gets an order

In the next blog, I will talk about improving your ability to sell. 

Feel free to ask me a question here or drop me an email and I will get back to you.

What are the sales techniques you have found useful? - Leave a comment below

Coming Soon, "Improving Your Ability to Sell"

Bob Cross

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Looking For Opportunities In 2011 Federal Budget

Penny Elbery - Monday, May 23, 2011

Business Success Is In Your Hands

Predictably, there was little direct help for small business in the recent federal budget. In spite of the contribution small businesses make to the general economy and to employment, the small business sector is widely ignored at budget time by federal governments of all political persuasions. As we've said before, you can't expect the government to contribute towards the viability of your business (you're not a bank after all). That's your job.

Tough or All Talk?

The government has stuck doggedly with its plan to bring the budget into surplus by 2012/13 – I'll leave it to the economists out there to discuss whether that's in the best interests of the country.

The government spruiked the budget as being "tough" but there was very little in the way of hard or controversial decisions.  It's clear that a minority government is going to steer a steady path through controversy (carbon tax and offshore refugee processing aside).

Look Strategically Beyond the Cuts and Handouts

Our advice to small business owners is to look past the immediate handouts and see whether the economic landscape has been reshaped in a way which offers indirect benefits to the strategically canny businessman.

Thinking strategically means looking at the spending as well as the savings to see what opportunities exist for your business.

There Are Opportunities

One way or another, Australia's population will have to increase to cope with the demand for labour, and all associated services will have to catch up with demand. As a business owner you need to ask yourself if you have an opportunity to supply growth areas and travel in the fast lane of WA's two-speed economy.

Looking at the budget in terms of strategic opportunities, here are some pointers:

• There is going to be spending on roads, rail, ports, health care, especially mental health.

• There are structural changes to training and workforce participation and, wait for it, a program for the installation of digital set-top boxes for pensioners.

• Education and training is a major initiative in this budget and $558m has been made available to provide training opportunities for 130,000 skilled workers.  

The Labour Outlook Remains Bleak

The education and training initiative may not be a major benefit to small businesses (unless you're in the skills training arena) because 130,000 new workers is a drop in the ocean compared to the 2.4 million skilled workers that Skills Australia estimate will be needed by the mining industry alone by 2015. So don't expect any supply driven labour cost savings in the next 10 years.

Not Only Wage Costs Will Go Up

Any strategic planning you do against the backdrop of this spending should also take into account that interest rates will probably rise - at least once over the next 6 months - and power costs will continue to increase.

Here's The Small Print

Many of the direct tax adjustments for small business are timing differences which offer short term cash flow positives but no absolute savings.  Changes include:

• lower PAYG instalments with PAYG payments set at last year's taxable income plus 4% (rather than 8%) but this only applies in the 2011/12 year.

• Businesses have the ability to claim an immediate $5,000 deduction on the cost of motor vehicles purchased in 2012/13 (plus 15% on the remainder in the first year and 30% per annum thereafter)

• In 2012-13 small business will be able to claim an immediate deduction for assets costing less than $5,000 (previously $1,000)

• Changes to the statutory formula for the calculation of FBT on motor vehicles will be phased in over the next 4 years to replace the four tier structure based on mileage with a flat 20%. If you are supplying a vehicle to employees as part of their salary package you may need to revisit the way you are calculating FBT and ensure you are minimising any cost impacts on your business.

Not a lot of cheer I'm afraid but there is little doubt that we are on the cusp of a major resources boom and substantial private funds will flow into major infrastructure. Supply to the resources sector will see continued demand and lifting State Royalties will not appreciably affect this growth. All business owners need to consider the opportunities.

Comments
John Thompson commented on 24-May-2011 01:12 PM
Hi Jon, Thanks for this information – very interesting and certainly flags the need to shift ones view and access opportunity if one wants to engage with the top tier of the two speed economy. It seems to me that there will be plenty of opportunity for
those companies and businesses who are already experienced in dealing with this level of corporate business activity. There appears to be urgency around the upcoming resources boom and I guess efficiency of providing services and getting the job done will
be important. Under normal circumstances I would expect the corporations directly involved in the boom utilizing the familiar networks and companies they have depended upon in the past. However, it sounds like not only will there be a shortage of skilled workers
but there will be a shortage of businesses who can provide the support and services the corporations need. So in the way they are looking outside of the normal networks for skilled workers (I heard an interview on radio national where this was being discussed
– The Canadians are concerned the Australians are going to Poach back the workers they previously poached from Australia, and more.) do you think they will be looking outside of their normal business networks for services and support. If that is the case it
presents a challenge to small businesses. Whilst there is plenty of training and support to transition skilled and unskilled workers from their old jobs into the resource work requirements and culture, I am not aware of two much training and support being
available to small business to assist them with gaining an entry point into providing services to this huge market. For example I have a product and service that can increase the efficiency and productivity of staff individually and collectively and there
must be a need for this. However I am not skilled in talking to people at this level about my products and services or even have experience with gaining an entry point for the discussion to take place. Are their government agencies or I courses available that
can assist those of us in small business who would like to access this booming industry. Surely this would benefit all involved. John Thompson Neurotribe.
Jon commented on 26-May-2011 10:34 AM
Hi John, Thanks for your comments. You raise a number of interesting points here: 1) It is usually the larger businesses that contract directly with the Chevron's and BHP's but once a contract is let, there is a filtering down to second, third and fourth
rung contractors. So although small business may find it hard to deal direct at the source, they need to network at the appropriate level based on their relative size and capability 2) I think that the short supply of skilled workers is going to be a problem
for many years to come. The Federal Government is speeding up the process of 457 visas and there is no doubt that skilled migration is an imperative. There are (and have been for many years) recruitment agencies working overseas specialising in recruitment
for the Australian market. 3) The last point you raise is how, if you have a new product do you get heard above the chatter and find an entry point to the multi-national businesses that might benefit from knowing about your capabilities. There are a number
of Government agencies and consultants who can help with marketing to a certain level of understanding but what you probably need to do is think outside the norm and look at specifically targeting entities that you know will benefit from your offering. This
takes planning and persistance. You have to find a contact who can give you access to an appropriate level, you have to educate and enlighten and make that first sale. It sounds difficult and there is plenty of other low-hanging fruit out there but it may
be that the more difficult targets give a more substantial result in the long run. Jon Elbery

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Government Grants and Help for Business

The Team - Monday, April 18, 2011

We often get asked whether there are any government grants available to businesses and how you go about claiming them.

There are a number of programs which offer tax concessions or cash subsidies, and here is a brief introduction to some that might offer assistance to your business. 

These programs are subject to change and some are competitive but it makes sense to check whether you might be eligible. With most of them there is substantial small print and an involved application process. We'd be happy to help you assess your eligibility and finalise your application.

Research and Development Tax Credit

The old R&D Tax Concession will be replaced in the 2010/11 year with a new R&D Tax Credit scheme which offers a refundable 45% tax credit for R&D expenditure for eligible businesses turning over less than $20 million per annum, and a non-refundable 40 per cent R&D tax credit for all other eligible businesses. 

"Refundable" means that if the credit exceeds your tax payable you can receive a cash refund. "Non-refundable" means that you cannot get cash back for any excess credit but you can carry the credit forward.

Commercialisation Australia

Commercialisation Australia is a competitive federal program offering four components of funding, these are:

Skills and Knowledge - up to $50,000 to purchase specialist advice and services. This component is aimed at assisting people new to commercialisation - researchers, individuals and small companies - who know their idea has commercial potential, but who don’t know what to do next. Applicants need to match the grant funding on an 80:20 basis, where the applicant contributes 20%.

Experienced Executives provides funding of up to $200,000 over two years (up to $100,000 per year) to engage an experienced Chief Executive Officer or other executives. Applicants need to match the grant funding on a 50:50 basis. 

Proof of Concept grants of between $50,000 and $250,000 are available to assist with testing the commercial viability of your business model or idea. Applicants need to match the grant funding on a 50:50 basis and complete this component within 12 months. 

Early Stage Commercialisation provides repayable grants from $250,000 to $2 million to undertake activities focusing on enabling a new product, process or service to be developed to the stage where it can be taken to market. Participants need to match the grant funding on a 50:50 basis and are required to repay grant monies on success of their commercialisation project. Applicants are expected to complete this component within two years. 

Export Market Development Grants (EMDG)

The EMDG scheme is administered by Austrade and provides assistance to small and medium Australian exporters seeking to develop export markets. The grant repays part of your eligible promotional expenses incurred in establishing your overseas’ markets. Applicants may qualify for up to 50 per cent reimbursement of eligible export marketing expenses above $20,000 pa to a maximum of eight grants. Up to $150,000 pa may be reimbursed.

Australian Apprenticeships Incentives Program

There are commonwealth cash incentives for the employment of apprentices:

$1,250 incentive for an employer who commences an Australian Apprentice in Certificate II training; 

or $1,500 incentive for an employer who commences an Australian Apprentice in Certificate III, IV or Diploma or Advanced Diploma qualifications.

In addition there are special commencement incentives for eligible Rural and Regional Australian Apprenticeships in Certificate III or IV level qualifications in selected non-metropolitan areas and for mature-aged workers.

Duty Clawback on Certain Imported Items 

The Certain Inputs to Manufacture (CIM) Program aims to improve the competitiveness of Australian industry by providing import duty concessions on certain imported raw materials and intermediate goods such as chemical, plastics or paper goods. Applications for the concession are primarily assessed on the basis of an independent technical assessment which demonstrates that the imported goods are substantially and demonstrably superior to comparable goods produced in Australia. 

Enterprise Connect

Enterprise Connect offers advice and support to eligible Australian small and medium sized businesses to help them reach their full potential by connecting them to independent business advisory services, business support, and a network of resources that draws together available knowledge, technology and business practices. 

Eligible small and medium businesses can request a comprehensive, confidential and independent Business Review at no cost. This is usually a 4 to 5 day review which delivers a report containing recommendations  for the development of the business. You are also usually encouraged to apply for financial assistance to help you implement the findings of the Business Review.

Enterprise Connect contributes half the cost of approved projects, up to a maximum of $20 000. 

To be eligible for Enterprise Connect your annual turnover must exceed $2m if you are based in the metropolitan area and $1.5m in regional areas, and you should not have received help from other government schemes in the past 3 years.

In addition, Enterprise Connect assistance is only available for the following industries:

Manufacturing, Creative Industries, Clean Technology, Innovative Regions, Resource Technology, Remote Enterprise, Defence Industry.

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Startups - Getting it Right

The Team - Wednesday, March 02, 2011

YOU'VE SACKED YOUR BOSS!

So you are starting your own business.  You are good at what you do, you have a great idea to develop a profitable business and you will not be dependent on a lousy boss.

What a time of great excitement!

Despite the statistics that everyone quotes, you really can have a successful and profitable outcome.  Just make sure that you attend to the basics – the alternative is that the business becomes your boss.

PLAN TO SUCCEED

The most basic of the basics is planning your way forward.  Know what you want, know what you have, know what you are going to do and how you will do it and know whether you have done it.  We work to an ABCDE process that incorporates this and more: your Aspiration, Baseline, Construction, Delivery and Engagement.

SET YOUR GOALS

What do you want for your business and your personal life?  Set three to five year goals for both of these aspects.  Have a hunger to be the best in your field.  Build your business with the same rigour as if you are going to franchise it at some point.

What do you have now?  Why are customers going to buy from you?  What problem do you solve for them?  Who will be your first five customers and why will they buy?  Why will they trust you?  Why will they need you?

How exactly are you going to achieve your aspiration – for the next year, for the next three years and for longer?    A Business Plan is the most important tool you will ever develop for your business.  It’s not boring because it is the way for you to have more fun, more cash, more time and more success.

HAVING A PLAN DOES NOT MEAN YOU ARE INFLEXIBLE

A Business Plan doesn’t lock you in.  Instead, it is like a plan for a holiday.  Sure, you see something else you want to do, so check how it interrupts and changes your original plans – will you have enough fuel, have accommodation and have money and still achieve your overall holiday goal?  If the answer is yes – then alter your holiday (or business) plan.

What is the market and how will it accept your product or service?  How will the market know you exist?  What marketing material will you need?  Will you ‘pull’ sales through advertising and web-marketing and/or will you ‘push’ sales through sales people (most businesses need both).

What is your organisational structure?  Draw a structure with all the positions that you will need when you’re successful.  Now put names to each position – oh there is only you, so put your name against all the positions.  Now you know how the company is going to grow.

DON'T IGNORE THE NUMBERS

Develop a financial plan with what you estimate income will be and the expenses that will be required to achieve that income.  If you hate the thought of doing a financial plan, then get someone on board who is able to help or you are doomed!

Comments
Chris Gray commented on 11-Apr-2011 06:53 AM
Hear hear! The basic financial plan is vital to the success of a start-up business. Financial capacity predetermines the size of everything about the business so is a fine place to start to ensure you do not run out of gas. Some say the only place to start which gets my tick.

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Succession - Change is Inevitable

The Team - Wednesday, February 16, 2011

CHANGE IS INEVITABLE – BUT MAKE SURE IT’S ON YOUR TERMS


It is a fact that every small business (including yours) will either change ownership or cease trading at some future time. Business "succession" is eventually an issue for all business owners. Every business owner will either want to sell, be forced to sell, or control of their business will pass to a partner or family member. In some cases death or bankruptcy dictate the succession process. 



YOU SHOULD CONTROL THE PROCESS



So it makes sense for business owners to face the inevitable and take positive steps at an early stage to optimise the value of their business and also the ease with which a sale or other transfer of the business can take place with a minimum of heartache for you, your partners or your family.


It is important that you control this process.  Your ownership will cease at some point and it is better for you and your family if this occurs in a planned and controlled way so that you can maximise your return for all your past efforts in building an asset.



THERE IS NO SUBSTITUTE FOR PLANNING



What we are talking about here is succession planning and it ranks as one of the most important elements of your planning process. 

A lack of proper succession planning could mean that:
   

  1. you have to stay working in your business long past your optimum retirement age;

  2. you don't maximise the price at which you sell the business; or

  3. your wife or the executors of your estate have to sort things out as best they can.


MAXIMISE YOUR VALUE



Failure to properly plan for succession can mean that the business isn't valued optimally on sale or transfer and, in some circumstances your family may be placed in the position of having to effect a quick sale of the business where if you are no longer around to handle the transaction. This is particularly dangerous where the family home may have been used as security for the business's bank borrowings.



MINIMISE YOUR RISKS



There are things you can do to reduce the risk of unplanned succession and also increase the value of your business as an asset so that when the business is sold, it can be transferred at a good price which still represents a reasonable buying proposition for the purchaser.

Here are some factors to consider and some ongoing strategies which should be put in place:



  1. If you are in business with others - family members, partners or shareholders - there should be a partnership or shareholder agreement in place which sets out how individual interests will be dealt with in the event of a forced or unplanned change in ownership.
        

  2. Discuss the issue with your family and partners. You might be surprised that the family members you were counting on to carry on the business actually want to do something completely different (all the more likely if they have seen you spend too many hours working whilst they were growing up)

  3. Get some good practical advice on succession planning.

  4. Set up great systems and procedures that help make the business less dependent on "you" and will not only make it easier for a family member to run the business but will also make it a much more attractive sale proposition.


  5. Keep good records of everything! A prospective buyer will probably want to see detailed sets of accounts for the previous 3 years. Ensure that they are consistent, that any material variances are explained and that debtors and creditors lists are "clean." Ensure also that records are kept of any "arrangements" with customers or suppliers which are outside the normal course of operations.


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Make Your Business Attractive to a Strategic Buyer

The Team - Tuesday, January 25, 2011

When it is time to sell their family home, many people just put it on the market for what they can get.  Many people run a business and then do the same – put it on the market.  At least there are always some sales for houses similar to yours but there is not usually a multitude of buyers for your business. 

Given the lack of ability to compare with like businesses, what is yours worth?  

Most accountants will tell you that it is a multiple of the firm’s profitability (typically 3 – 4 times Earnings Before Interest & Taxes).  Yes - most businesses are sold on the basis of today's financial statements. But some companies sell for thirty times and some for only one times that figure and some companies are valued in the millions when they have never made a profit.

Clearly, other factors can be addressed to increase the value of your business. A less well-known – but much more valuable – approach is to sell the business based on what it will do for another company.  Indeed, many buyers may need to have explained to them why they should take on a business that is strategic to them.  The secret is to get away from a purely financial valuation based on your P&L and Balance Sheet and begin directing your business towards a strategic sale.

In the same way that you can improve aspects of your house over a few months to obtain higher value, you can work on your business over a couple of years or so to add the value that will increase your own net worth. The rigour of strategically preparing your business will result in a sustainable growth in earnings and in good systems and procedures that allow the business to operate without you. Your value will be increased even though you may have no immediate plans to sell your business.

You should start by thinking about the people you know and who know your business – your suppliers, customers and competitors.  Who among them may see revenue potential in a combined business?  Maybe it’s not revenue that will interest them, but a means of managing their risks and threats. Maybe they would want to buy rather than build an expansion of their business in your area of expertise.  

Look at your business through the eye of a potential buyer (or have somebody do it for you), then over a period of time address the key criteria.  Who are the key people in your business?  Is it you – if so then you must start skilling up a replacement.  Look after your key employees for both your benefit and theirs.  Do your accounts need cleaning up and are they in a form that they are necessary part of managing your business?

However, just like selling your house in a hurry, you won’t generally get increased value at the last minute.  Start acting strategically NOW to increase your value – some possible steps over a two year period are:

    - identify possible buyers that may benefit from owning your business;

    - understand what their risks are to their own business;

    - develop a statement of what your opertion would add to their business;

    - brainstorm what they would find risky about integrating your business with their         business;

    - take action to address their integration risks;

    - start a Due Diligence file on your own business and work to remove problems;

    - slowly bring possible buyers into the fold – not as a possible purchaser but as           someone who will more closely with you than they do; now; and

    - in small increments, let them see the inner workings of your business.

We cannot overstate the importance of you undertaking Due Diligence on yourself and cleaning up all aspects to get you through the process that someone will take.  When it does come to having a potential buyer conducting Due Diligence, be open and honest.  Nothing will reduce your value by being caught in a deception.

At NOW Business Mastery, we understand the process of a strategic sale and the steps to take to build value in your business.

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Independent Contractors or Employees

The Team - Tuesday, January 11, 2011

Independent Contractors or Employees

It is your responsibility as a small business owner to ensure that you comply with the law regarding contractors vs employees. With a few exceptions, employees now have to be paid strictly in accordance with the Fair Work Act 2009.

In many cases, businesses also legitimately engage contractors, but the ground rules on employment and contracting are changing and failure to comply with the legislation could be expensive for small businesses.

If you have any concerns about your employment practices it would be a good idea to get some assistance to ensure you comply.

Many businesses are not protected

Under the Fair Work Legislation and under the tax act you have to treat contractors and employees correctly or risk incurring fines and additional costs in back pay.

Many individuals prefer the flexibility of being paid as a contractor, and many employers strike mutually satisfactory deals with contractors which cost employers less than treating those contractors as employees.

Employers complain to us that:

a)   they can’t get people to work for them as employees and have to engage them as contractors and
b)   they’d be uncompetitive in their highly competitive market where everyone else pays their workers as subcontractors.

It’s not only the hourly rate which is at issue, there is also the matter of worker’s compensation insurance, PAYG tax, GST and superannuation and leave payments.

Sham Contracting can be expensive

Sham Contracting is where you pay people as contractors when they are really employees. The risks are substantial and you need to be aware that not only can you be fined up to $33,000 for each offence but you might receive a claim for unpaid PAYG tax and superannuation. An employee might also claim for back pay, including penalty rates, superannuation and leave entitlements.

So how do you determine whether someone is a true contractor or should be treated as an employee?

There is no definitive test to determine whether a subcontractor should be an employee and each set of circumstances needs to be examined. There are, however, certain guidelines

The Federal Government has published booklet titled “Independent Contractors: The Essential Handbook” (available as a free download from the Australian Government website)

This booklet is a comprehensive resource for both contractors and employers. In its own words: “This plain-English handbook goes a long way towards giving businesses and the independent contractors they engage a simple guide to the rules and regulations and the rights and obligations on both sides.”

Also on this web page is a link to a contractor decision tool to help you assess whether contractors are correctly classified.

There are a number of “tests” as to whether a contractor is a true contractor or an employee. One of the more significant tests relates to the question of who bears the risk. A contractor operates a business that produces a result for an agreed price and bears the risk. They are free to delegate the work to their employees (or other contractors) and are obligated to produce goods or services to a specification and a timeframe. If they fail to deliver they don’t get paid, whereas employees do not carry full risk and will (with some exceptions) in the short term continue to receive wages.

On the “Executive Stress Office Support” web site there is an excellent blog which sets out the current criteria for the classification of contractors. This is an extract

“Currently, the rules are that independent contractors (ICs) need to meet certain criteria before they can be deemed to be independent contractors. These include things like the services should be available to the public at large, not just the person/company to whom the services are currently being provided; the IC should be able to hire others to perform the work (sub-contractors); the IC should be able to work on more than one contract at a time; the client has little input into how the IC actually performs the services; and of course, the 80% rule: the IC should not receive more than 80% of their income from the one client.”

Read the full article by clicking here

This area of conflict between employment and contracting is important for many businesses and is subject to change and re-interpretation from time to time by both government and the Tax Office. Small business owners should check compliance from time to time to ensure that their practices are still correct.

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