How can SMEs pay for innovation?

SMEs are the lifeblood of an economy and generally have been the most innovative businesses.

It is often said that while the big corporations have the resources for large-scale, ongoing R & D their effort is largely focused on existing products.

But while historically many new ideas have originated from inventors “tinkering” in their spare time, this is less likely in the 21st Century.

Very few SMEs will have a turnover with a sufficient margin to allow for funding ongoing research and development, especially in the highly technical, software, biomedical and scientific fields.

Yet to survive and prosper, SMEs need to find their niche and then innovation to stay ahead of the competition. Can this be done?

There are a number of options. In the UK there is the STEM (Science, Technology, Engineering and Maths) project in schools, supported by businesses, which is designed to encourage the next generation of innovators.

There are also collaborations between businesses and universities, both in the UK and elsewhere.

There is also an EU programme specifically designed to support innovative SMEs with funding and by connecting them with mentoring and other partners. Horizon 2020 can invest up to £2 million in a company and is worth looking at if you are truly innovative: www.h2020uk.org/smes.

Do also contact us at K2 as we are familiar with this and other sources of finance.

Export opportunities for SMEs? Go take a look

A global economy does not necessarily mean a homogeneous economy.

Many SMEs struggling to grow their business in the currently unstable UK market doubt whether there will be demand overseas for the goods or services they offer locally, but they could be wrong.

Former property surveyor Chris Ives, writing in the Guardian small business column, is a good example. He set up a micro brewery producing unusual beers after losing his job in the 2008 crash.

Daunted at first by the risk involved in venturing into export, by the perceived expense and by a lack of confidence he took advantage of the facilities offered by UKTI (UK Trade and Investment) and an opportunity to join trade missions run by a well-known bank.

Now he is exporting to the US, Canada and Scandinavia.

He says the keys to successful exporting for a small business depend on visiting your potential market, doing the research and meeting potential partners.

Do you know other small businesses that have made a success of exporting?

HMRC has powers to demand security payments

HMRC is using its powers to demand security payments from company officers for VAT, PAYE and NIC where it considers there is a likelihood of default.

In a case in November 2014 HMRC served a demand notice for a total of almost £70,000 on three named individuals, two directors and the company secretary, of a Berkshire-based metals fabrication company.

An amendment to regulations was made in 2012 allowing HMRC to demand security payments from officers of companies, where it was felt there was a high risk that taxes would not be paid.

HMRC can hold the money as a deposit for up to two years and use it to satisfy any overdue tax debts the company may have.

In our experience such notices have previously only been used for Phoenix companies and not for a trading company.

This new development of personal financial liability is something SME directors and company secretaries need to be aware of and if there is any risk of the company becoming insolvent or being forced into liquidation it would be wise to consult a business rescue advisor early.

SME – Supplier relationships should be nurtured

If a business is to survive it needs to manage relationships with both its own suppliers as well as with customers. It also needs to consider the risk of being dependent on a supplier or customer.

The revelations about suppliers to Tesco and now Premier Foods are a graphic illustration of the danger of relying too heavily on one customer. A dominant customer can exert control over prices and margins and as in the case of Tesco, demand a raft of marketing support fees.

There is a point when the relationship can become no longer economically viable but if you are not prepared it can be impossible to terminate without putting your own business’ survival in jeopardy.

Many SMEs in particular, like farmers, have been forced out of business by not being able to say “no” to the demands of their supermarket chain customers. Research by accountancy firm Moore Stephens has recently revealed that 146 food producers have become insolvent this year, an increase from 114 last year, in part because of supermarket price wars.

It is not only an issue for food producers and superstore supply chains. Some years ago the Ford motor manufacturer put similar downward pressure on its suppliers, many of whom went bust. In the end Ford had to buy some out of insolvency in order to ensure continuity of supply and its own survival.

The lesson is that SMEs should not only avoid becoming locked into supplying only one customer, but also to learn to say “no” to pressure.

No business can exist in complete isolation. If businesses treat others as fairly as they expect to be treated themselves, then ultimately everyone in the supply chain can survive and benefit.

Should SMEs ignore the doom mongers?

Many small business owners will be members of their local Chambers of Commerce, perhaps the FSB (Federation of Small Businesses) and their own trade bodies.

Some will also keep a close eye on the business and economic news in the business media. But what kinds of messages do they get from all this?

As they say, “bad news sells”. There has been a fair amount of doom and gloom in the headlines. The Prime Minister’s warnings of the threat of EU stagnation to the UK economy and a new CBI survey reporting that optimism in the service sector is at its lowest for 21 months are two recent examples.

Arguably, most SMEs will be keeping an eye on their cash flow, management accounts, orders and profits as part of the daily tasks of running a business. So they will know how their own businesses are performing.

But how much notice should they take of the UK economy?

It is difficult enough to plan ahead and especially when considering investment in growth. It is even more difficult in times of economic uncertainty or volatility.

There is some evidence that reports of diminishing confidence actually become a self fulfilling prophecy that actually affects business activity.

So should SMEs just grow a thick skin, ignore it all and carry on regardless?

Ruling on creditors meetings will help improve CVA outcomes

Creditors meetings for insolvency proceedings will no longer be needed unless requested by least 10% of creditors following a new government ruling as part of its small business reforms.

The Insolvency Service argued that attendance of creditors’ meetings is poor and there are more effective means of engagement in the 21st Century.

When trying to rescue a business in difficulty, Insolvency Practitioners have a number of options and one of the most helpful is the CVA (Creditors’ Voluntary Agreement) by which debts can be negotiated by a company to repay its creditors over a longer period and sometimes repaying a reduced amount.

Proposals must be drawn up and submitted to all creditors in advance for negotiation and approval. Approval requires a majority of 75% of votes cast.

Since any insolvency proceeding has to comply with a series of steps laid down by law, and IPs are paid for their services, the costs can quickly mount when creditors’ meetings are added to the mix.

Subject to approval the cost of holding creditors’ meetings can be saved and reduce the burden on both the company as well as improving the distribution to creditors.

Another bank inquiry – increased costs for SMEs?

Yet another massive fine, RBS again, this time £56 million for a computer meltdown in 2012 that left people unable to access their accounts.

In recent weeks there seems to have been a steady stream of fines for a variety of misdeeds.

Yet will it make any difference?

We, along with many others, have been saying for months if not years that SMEs and personal customers have been badly served by the “big four” (Lloyds, HSBC, RBS and Barclays) who between them have 85% of the small business banking and 77% of the personal account markets in the UK.

And now the Competition and Markets Authority (CMA) has begun an 18-month investigation into how banks treat their customers.

Who knows how many more revelations about bank misbehaviour are yet to emerge from this new investigation?

Will there be more fines?

Despite the schadenfreude, let’s be clear fines are ultimately paid by customers, not the banks.

What has emerged is that the cleanup now means that banks don’t make much out of their SME and personal accounts which has resulted in the introduction of various regular charges and closure of branches.

It is not yet clear whether the rhetoric will result in any meaningful change that improves the relationship between banks and SMEs.

It is however clear that the cost of banking services will increase for SMEs.

Record keeping and HMRC communication

SMEs should be prepared for HM Revenue and Customs (HMRC) to become more aggressive in following up on late payment and tax avoidance.

MPs criticised HMRC this month after it emerged that the difference between the amount it should collect and its actual collection total had increased by £1 billion (from £33bn to £34bn) in the year to April 2013.

The tax gap is also forecast to increase by a further £3bn for the year to 2014.

The House of Commons’ Public Accounts Committee has also criticised HMRC for not doing enough, quickly enough in tackling tax avoidance schemes.

SMEs are arguably easy targets when HMRC is coming under pressure so they would be wise to ensure that their records are all in order and payments up to date.

It is important to keep copies of all filings and communications with HMRC, preferably confirming phone calls in writing and to not ignore any communications from them.

If you are unable to pay a liability, they are helpful and providing you are proactive they will agree payment terms. If you do agree payment terms then stick to them otherwise they won’t believe any other undertakings you give so make sure your cash flow forecasts are realistic.

Independent of making any payments, make sure your various tax returns (VAT, RTI -PAYE and corporation tax) are submitted on time to avoid automatic penalties.

If it is all becoming too much, remember tax is one area where early help from a professional can be invaluable.

What can SMEs do to improve productivity?

With so much uncertainty still hanging over the economic recovery it is tempting and prudent for SMEs to continue to watch their cash flow and keep a tight rein on spending.

However, there may be some instances where this could be a false economy that will inhibit a future productivity gain.

We have been seeing businesses that are still holding back on upgrading their IT systems or software.

Businesses use IT to make life easier and more efficient and while it makes no sense to try to keep pace with constant IT innovation, equally it can be counter-productive to hold on too long to the point where a system is either very slow or no longer fit for purpose.

A good example is switching to online bookkeeping. This is a case where changing to an online bookkeeping system rather than using an old-fashioned manual method or even a computer package is likely to save both time and money. Not only can the online system be shared with key people or outsourced to a bookkeeper but it can be monitored by your accountant, saving on the time and costs as well as offering scope for improving the quality of reports.

Perhaps you can suggest other examples of processes that could help SMEs to boost productivity?

Women, the gender pay gap and parenting

It has been calculated that women in full-time employment earn 15.7% less than men.

Indeed, maternity leave and taking time out to bring up children can do serious damage to a woman’s career and lifetime earning potential. However, is it realistic for women to expect to go back into work at the same level as their peers who continued with their careers after a period of child rearing?

And what happens when a woman has sacrificed a high powered job or put her career on hold to rear children if her marriage breaks down? Sadly, divorce court financial settlements in such cases are rarely equitable and often do not take the sacrifices into account.

What advice should we give to our daughters? Share the parenting role more equitably? Avoid taking time out for parenting? Insist on a pre-nuptial agreement?  Start her own business?