Finance is cool

I have to say that I was pleasantly surprised by Mr Osborne’s budget and think that it will do a lot to help boost the economy.

In all cases I think the government needs to be clear of the aims for the steps taken in the budget and make sure the right people have the right access to education around what they could mean for their business.

The elements of the budget designed to make the UK more attractive for business are definitely the good here:

* Lower corporation tax (to 24% April 2012, with a further reduction to 23% and 22% in the subsequent 2 years)

* Revision of the Controlled Foreign Companies Regulations to make it less challenging for foreign companies to set up and operate in the UK

* A change to the top rate of income tax that will be welcome news to companies looking for top talent (reduction from 50% to 45% in April 2013)

* The introduction of the Small Enterprise Investment scheme (SEIS) offering angel investors significant tax reliefs on investing in small companies, both allowing them to offset any tax they have paid through PAYE and on any capital gains they have made against their investments. This could equal a tax relief for the angel of anywhere up to 78% on these investments which is a pretty strong incentive to invest in start ups in the UK

*The increase in the personal allowance, as promised this is heading towards £10,000 and will be £9,205 by April 2013, great news for lower and middle income earners in the UK, making the UK a better place for personal wealth in some bands

The progress the government is making towards encouraging innovation is also promising:

* Enhancing allowances for R&D tax credit to 225% of qualifying expenditure, a great thing for tech start ups and other innovative companies in the form of tax relief and in some cases a cash payment for continuing investment in R&D

* The introduction of “Patent Box” which will mean a 10% rate of tax on profits relating to patents, a great incentive to work on new and interesting projects

* In the case of the EMI share option scheme, the increase in the limit per individual to £250,000 for tax advantaged share option grants thereby allowing more to be given back to employees on the scheme

* In addition, I was simply doing cartwheels when I read about the proposed extension of entrepreneur’s relief to all shares acquired through EMI, rewarding not just entrepreneurs for building great companies but their staff as well

So really the only things that I felt were bad/wonky were relatively few:

* It is great that the top rate of income tax has been targeted for decrease but is still leaves the UK income tax rate comparatively high when looking at other countries

* It was a bit of a surprise that there was no extra CGT relief in the budget which could undoubtedly be beneficial to individuals investing in private companies

* The R&D tax credit qualifying expenditure increase is fantastic but I still feel that there needs to be more education for businesses about how they apply for it. I have been through this several times now and once you know how to do it, it is relatively easy. However for small business owners the lack of knowledge around how it is done may act as a deterrent to applying

* The introduction of the General Anti Abuse Rule (GAAR) which the government has promised is designed to target the most extreme tax avoiders sounds like it could introduce a lot of additional work and red tape for companies if done the wrong way. This feels like a bit of a ‘wait and see’ as the consultation period is going to be a year. Personally I feel that it will be very difficult to distinguish careful tax planning from avoidance and may negatively impact a greater number of companies than it is designed to target

* The integration of income tax and NIC sounds like a good thing but alongside pension auto enrolment and HMRC’s real time information incentive will bring a lot of transitional headaches and work for companies on their operational payroll structure

* The tax relief for games companies (which has been long awaited) is a great thing to have been recognised by the government, however if it is based around corporation tax it won’t help the majority of start ups in this area who are not revenue or profit generating in the early phases. I do hope it will encourage the same behaviour as we have seen in places like Canada whereby larger games companies have created gaming hubs – building campuses where they co exist with universities and all sorts of other facilities to encourage creativity and innovation. I do think there is still a lot that needs to be done at the educational level in the UK to get the most from these incentives, things like improving and tailoring university courses for example

All in all, good work Mr Osborne!

Nick Clegg is urging more small companies to give staff the opportunity to be part of a share option scheme. I salute this, we have done this at Mind Candy since the company was founded, and continue to do so today.

Companies that offer employees the chance to be shareholders are just plain smart in my opinion. There are many of them and they aren’t just start ups, I mean look at John Lewis!

I also know that there is  controversy around whether this idea actually works or not…my response…it is all in the communication and education.

I run six monthly share option workshops internally giving staff the chance to understand and ask questions about their options. I have seen a greater bond between staff members and their options since showing them that there is value in them. Staff are empowered when they realise that they own a part of the company and that they can move the needle as to the company’s value and ultimately create a greater ROI in their own stockholding.

The rather large caveat being that the whole mechanism is built around larger chunks being given out to staff that join at the beginning when the company concept is yet to be proven and salaries are relatively low, therefore it is harder to show value at an early stage as it is all potential. It is worth doing though, the sense of ownership and being a big part of something unknown that staff believe in is truly unifying.

At MC we could have stopped giving out options by now as many start ups do, but chose to still give a piece of the company to everyone who starts with us in a bid to continue making sure we build a company of owners rather than just an organisation of employees. We have truly talented people working for us, it just makes sense.

Now for the moan, and to be fair the tone of this post means that there has to be a moan.

It is all very well that the government is encouraging us to incentivise our employees and that they are also giving entrepreneurs a nice deal when it comes to tax relief and visas, but what about all of those senior staff members that build a company alongside a CEO sometimes for years? Basically I mean the largely invisible management team that work with the founder to help them to realise their vision?

As the COO/CFO at Mind Candy and having been around in start ups and small companies for a while, I always get asked what measures the government should take to help entrepreneurs to build their companies into successes in order to boost the economy. The answer is to help the people who support the entrepreneurs to realise their dreams. Give VCs and angels incentives to fund start ups and make sure there are continued incentives for employees via share option plans by all means, but honestly make sure those senior staff members who support entrepreneurs tirelessly and work every hour that god sends get their own tax incentives and a little bit of love back.

The wonderful Robin Klein recently posted a great article along the same lines on The Accelerator Group blog.

I say “hear, hear!”.

Not everyone is a fan of acronyms, however when it comes to any form of budgeting the mnemonic SMART definitely needs to be the goal. Budgets must be specific, measurable, achievable, relevant and time bound, to make a business successful and to give those with budget responsibility the best chance of using their budget to the greatest advantage.

Budgeting for digital marketing brings its own challenges as new opportunities open up constantly in different areas as technology advances. So in my experience, what are the best tools to budget for online marketing?

1) Using historical figures; once you have a good insight into your business and the metrics associated with your marketing channels and your funnel you can benchmark future opportunities with those past, and work out the amount of marketing dollars to put toward an opportunity through trialling whilst keenly and frequently assessing the results.

2) Using a % of revenue; if the realm of digital marketing is completely new to your business then using a % of revenue can be a good technique, especially if you have benchmarks from other companies in your area. This works as long as you are aware of the costs that your business incurs and take this into account when setting the %. If done correctly it will make sure that when times are lean your marketing budget is slimmed down.

3) Using a % of net profit, again this is a good tool if you want to avoid spending more than you are making especially if it is staggered from one month to the next. If margins are tight then this can mean that the business does not get itself in trouble as long as other areas of the financial machine are working properly eg working capital management. On the flip side, it can also mean that opportunities are missed due to under spending.

4) Spending up to the point whereby marginal cost = marginal revenue broken down to specific marketing channel level. This thereby ensures that the effects of diminishing returns and demand drying up in that channel are addressed. It also allows a business to continuously re-invest the profit made from the different channels and profit maximise constantly. Any channels that tail off can be eradicated as becomes necessary. Again this relies on good working capital management.

It is worth noting that all of these tools are only as good as the businesses metrics and reporting systems. Without proper metrics and a keen eye on timely financial results, none of these tools will work properly.

Furthermore, online marketing channels need constant supervision and tweaking as there are a lot of unknowns in new markets eg demographics behind demand for the product, whether or not there is perfect competition in the market and so on. Also, diminishing returns occur at vastly different rates in different channels.

A very close eye needs to be kept on working capital management as mentioned above, money can only be reinvested when it has been received by the business otherwise there is a distinct possibility of cash flow difficulty. In the digital space it is possible to achieve unheard of metrics when it comes to working capital management, if it is something that is strived for by the staff responsible.

5) Lastly, using a mixture of the different measures can be prudent at different stages in the businesses growth and the product lifecycle. Online marketing budgets can be honed as results are gathered and metrics understood.

These tools give an idea of how budgeting for digital marketing can be SMART.

In Alastair Darling’s 2010 budget he announced that he wanted to offer help to the computer games sector, similar to the steps which are helping to restore the fortunes of the British film industry, acknowledging that we need to find a way to keep British talent in this country.

I was lucky enough to be invited to the ‘Games Tax Relief Summit’ hosted by Deloitte and attended by a healthy mixture of some of the smaller studios and some of the heavy hitters in the games industry namely Sony, EA and Activision Blizzard.

It is with crossed fingers that we are all approaching George Osborne’s new budget on the 22nd June as we are hoping that the new government will honour the hard work of Richard Wilson and his colleagues at TIGA in raising awareness of the problems faced by the games industry in this country.

I was honoured to be invited to speak at the All Party Parliamentary Group earlier this year at the House Of Commons to help throw some light on the issues faced by start up games companies in the UK, and encourage MPs to act on our behalf. Issues such as gaining and retaining talent, the lack of funding available to smaller companies with no tangible assets and the quality of graduates and University courses in the gaming sector to name but a few.

At the Summit, all the representatives were offered the chance to input to the structure of the proposed games tax relief in order that it will suit all size of companies and all types of online and offline games. The relief was initially designed to steal elements of the film tax relief and the R&D tax credit system although it became apparent that both of these systems have their problems and shoe-horning this tax credit into one of those formats will simply not be effective enough.

The games sector contributed approximately £1 billion to the UK’s GDP in 2009 and generated £400 million for HM Treasury in tax revenues and is under stiff competition from the likes of Australia, Canada, China, France, South Korea, Singapore and the USA, all countries that receive regional/state tax breaks for games production or other significant financial assistance.

The generous tax credits in areas such as Quebec in Canada have created pockets of amazing gaming talent, Quebec is now considered to be a made up of ‘games clusters’, areas where the games industry is supported by government, educational institutions and other community services. I would love gaming to be treated the same way in the UK and for the same phenomena to occur here.

Fingers crossed for the new budget.

“The average international gross per Pixar film is more than $550 million” according to the new article in Wired this month. I am a huge fan of Pixar films, and find the emotion that is baked into their animated films breath-taking.

I had the pleasure of attending a brilliant talk by Matthew Luhn at GDC this year which went a long way toward helping me to understand how they make their films so emotionally rich. No expense is spared when it comes to the quality of the storytelling and I believe that this is one of the secrets to Pixar’s multi-blockbuster successes.

Luhn started by explaining the history of stories and how ancient the roots of storytelling are. Different cultures have always been influenced by their environment, and use stories to entertain and educate.

Storyboards as a plan are incredibly important pre-investment in a film. The storyboarding process starts with the Director’s idea, from this a story structure is created.

Story Artists like Luhn need to be multi-skilled as writers, actors, comedians, draftsmen, salesmen, editors and cinematographers, working closely with Directors to help communicate the vision for a film.

Beatboards are developed, these are clear drawings for key moments of the film, similar to children’s book illustrations, beatboards often include many deleted scenes as the drawings determine which scenes would not work.

Character development is a key part of the process. The characters are given identifiable human traits that people can relate to and identifiable human occupations, nationalities even, the process of character development can lead to actual scenes in the movies. Characters are invoked out of thin air using a short thought process; It is… what is the character’s physical appearance? You are…what is the character’s relationship to you? Thou art….what did this represent/embody to you? I am…be the item, personify it, describe what the item’s life is like. For example, in the case of Toy Story, the characters came from some of the Story Artist’s childhood toys.

The story starts with a controlling idea, an idea distilled into one sentence. We were asked to distill a favourite film into one sentence…. a young boy from a sheltered childhood on a remote planet loses his family and in so doing discovers his untapped potential and the dark secrets of his heritage…. I am sure you can guess mine!?.

The entire project is outlined up front by starting with story ideas to figure out if the story will work prior to animation and production.

Every good story follows the same structure…try this out on your favourite film, try it out on a Pixar animation even!

Once upon a time….and every day…. Exposition; characters are introduced, the rules of the story world are set down.

Until one day….. Inciting Incident; an event that causes the story to start in earnest and action to be taken.

And because of that….and because of that…. Progressive Complications; problems/issues that get in the way of completing the action, these escalate during the film and help facilitate the story’s learnings.

Until finally… Crisis & Climax; everything comes to a head and learnings are used.

And since that day…. Resolution; the story works itself out for the good or the bad.

The moral of the story is…. Theme; the ultimate learning.

The ultimate business learning from this talk for me was about quality. Quality is so important to consumers and as technology advances, consumers expect the level of quality in all areas of their lives to be higher and higher. I think it is a lesson that all businesses need to take on board to be successful.

This year’s SXSW has not disappointed, some panels simmered away whilst others exploded with passion and interest, not least Larry Chiang’s VC Secrets, which I was very happy to be part of. These are some of my takeaways.

*In order to raise money, one guy invited 10 potential angel investors to dinner; he got his investment.

*Fundraising is also “friend-raising”.

*If you are looking for advice, ask for money and if you are looking for money, ask for advice.

*VCs want to know WHY entrepreneurs are doing what they are doing – what drives them.

*If your proposal is interesting enough, you do not have to take a VC to lunch, in fact it sounds like they would prefer that you didn’t.

*Don’t forgot about government grants.

*When fundraising, you are also shopping for a mentor.

*Look to friends and family as angels.

*Bootstrap your business as much as you can.

*Practice cost avoidance, companies offer startups good deals (eg Sun Microsystems) and free software (eg Microsoft BizSpark).

*Host a local meet up for entrepreneurs and invite a VC.

*Be prepared to accept a lower valuation to attract angels/VCs to access their expertise.

*Certain investors have certain focuses – industry sectors they prefer to invest in.

*VC deals are not initially about cross pollenation between other investments in their portfolio, although this can come in handy later.

*Never lie to a VC.

*VCs rank potential deals, one example being hot, high, medium, low, dead. The last three are not good. The VC will interact with deal companies accordingly.

*Don’t be afraid to lower the amount of capital you are trying to raise to close a deal.

*VCs want to invest when they feel like they know something that other people don’t.

*Being a CEO can be a lonely job, have a network of like minded people.

*Some lawyers will do legal work for early stage startups for free or for less in order to start a relationship.

*Keep an investment pitch to time and include details of the market, strategy, monetisation plans, and why the team are the perfect people to take the company to where it needs to be.

*The last 3 months of great metrics are far better than 3 months of projections.

*There are many angel search tools online.

*Find investors through your network – other companies, friends, linked in, portfolio companies.

*Most importantly, be pleasant and polite to the VC’s staff. I think this goes for any deal, ever.

Last but not least….

*Larry says “treat a VC like a girl you desperately wanted to date in high school”!!!!!

I was horrified to read that less than 10% of SMEs in the UK reclaim R&D tax credit. 

Having just been through this at Mind Candy I can see why the process has the reputation for being difficult and confusing. 

I love small companies, and the amount of tax credit available in the form of a cash rebate to those that are loss making can make a real difference to cash flow, especially in these turbulent times. In this case the cash credit payable is equivalent to £24 per £100 of qualifying expenditure, quite a significant sum. The company must surrender part of its loss so that it can’t be used against future profits. It must also have paid PAYE and NICS on remuneration in the period of an amount at least equal to the tax credit claimed.

For companies making a profit, or who have no PAYE payments in the period, the tax credit works by providing an enhanced loss.

There is a significant lack of readable information available about reclaiming, even the information given on the HMRC website is confusing. I must say though that the R&D unit that we went through (based in Cardiff) were very helpful indeed.

There are several points that I hope will help other SMEs to reclaim:

*The R&D credit is not reclaimable on the short form CT600, only on the longer form, this is available from the HMRC website.

*Download the information available from the HMRC website, you will find an excel template to help you to work it out, information about what you can and can’t reclaim, and a guide to the questions that need to be addressed in respect of a claim.

*Create an overview document that introduces your company/products/services and answer the questions mentioned above clearly, we included:

       *Introduction

       *Time frame

       *What was the scientific or technological advance?

       *What were the scientific or technological uncertainties involved in the project?

       *How and when were the uncertainties overcome?

       *Why was the knowledge being sought not readily deducible by a competent professional?

       *Pull together evidence for the work claimed in whatever form – we submitted architecture diagrams, developer commit logs, payroll records and invoices for consumables.

*If you have a patent, it can be influential to a claim, include it.

*Your accountant (if you have one) may not have mentioned the R&D tax credit to you, mention it to them, they can help you.

Good luck!

About Me

COO/CFO at Mind Candy Ltd, an exciting entertainment company creating brands with a digital heart. Most recent Mind Candy offering is www.moshimonsters.com for little kids and big kids alike!

At Mind Candy, responsible for defining and delivering innovative ways of increasing company efficiency and maximising shareholder value. With responsibility for company finance, ops & HR. Member of the six strong management team, board observer and Company Secretary, fully qualified Chartered Management Accountant (FCMA) and Associate Member of the CIPD.

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