Government austerity measures are likely to have a severe impact on John Wilkes’ business, but he’s already planning for survival.

The biggest issue John Wilkes and his firm ANDS faces is the current cutbacks in the public sector. And while business is good at the moment, he’s  well aware that now’s the time to prepare for a downturn.

ANDS offers training and recruitment services to local authorities and their providers. “We tend to work in the areas such as land maintenance, waste management, low level IT and – which is our biggest areas – parking enforcement,” explains John. “When I tell people we recruit and train traffic wardens, we’re suddenly their least popular contact. But it is a vital part of how the country works.”

John’s business model is to sign long term contracts with local councils with an agreement to recruit and train a certain number of people per year, either in one specific area or across a range of different roles. While never the staff’s employer, ANDS is also responsible for performance measurement and ensuring the staffing levels remain at the required rate. “So we may have a contract to bring eight people on board a year, but if two of those leave within that year, it’s our role to replace them.”

The actual recruitment of people is not that difficult, says John, despite the reputation of many of the roles he recruits for. “Our main purpose is more on the administration side – most of the positions require criminal record checks, and we need to be very careful that those we do hire have the right to remain and work in the country. It’s also in our best interest to ensure they are genuinely keen to do the job, because the cost of replacing people also falls to us.”

Starting up

John started ANDS with two colleagues six years ago, when the local authority he was then working for decided to outsource the operations for his business. The trio would have either been made redundant or been transferred to a new employer, so they thought that with their knowledge of how the system worked, they should form a business and bid for it themselves. “The council was initially a bit unsure about using us – we’d done a good job for it but we were a new company. And while the first contract was small, it didn’t want anything to go wrong. It took us a long time to even convince them that we should be taken seriously. Even then, we didn’t get any preferential treatment, our bid was decided on its own merits and we were up against two other providers, each of whom had far more experience.” Fortunately, John’s business won the contract, and from that moment on, events moved at a rapid pace.

“All three of us had only worked in local government for our whole lives and we didn’t have any experience of running our own business, so it was a steep learning curve!”

Each partner put in an initial £20,000 to get the business started and agreed to defer salaries for three months. “Our start up costs weren’t that high,” explains John. “We already had the first contract so we would be working on that to start with, so we needed office space, IT and some funds to pay for recruitment and training costs.”

Even though its first client was a central London council, the new company felt that there was no need to pay the high commercial rents of central London and instead took a suite in a serviced office out in the suburbs.

“Taking an office in the centre of the city would have cost us at least a thousand pounds a week,” he says. “We now don’t even pay that a month.”

Once the first contract was up and running, the main priority for the company was to bring in additional business. “This first job was a good one, but it wasn’t enough to sustain the three of us in the long term,” explains John. “But we wanted to show that we were able to do a good job so we didn’t bid for anything else for the first six months so we could build up our reputation. Our timing proved to be good, as a number of tenders came up about five months after we started. We bid for all the ones we thought we could do, which numbered about 11 different contracts, and we managed to secure two of them. We were actually quite disappointed that this was all we got, but in the event it turned out for the best – we couldn’t have coped if we had any more.”

Since then, the business has grown steadily. With each contract lasting for an average of two years, the company has picked up a net average of three a year,
and now works for eight different local authorities on 15 different projects. The three founders are still part of the business, which has hired a further six full time staff as well as a number on short term or part time contracts for busy periods or when additional specialist skills are required.

“We’re not exactly millionaires,” says John, “but we’ve done pretty well and I’m happy with the way the business has developed. We’ve built ourselves a good reputation to the extent where we are now invited to tender for projects rather than having to push ourselves in. We’ve got good relationships with most of our
clients, and also with our suppliers, such as recruitment agencies and specialist training organisations.”

Finances

ANDS launched with a basic bank account from HSBC, and has never seen a need to switch. “We don’t see a lot of different payments go through, we are not a cash business and I can do almost everything with internet banking, so the actual bank charges are fairly irrelevant to us,” explains John.

One of the issues the company does face is late payment. “We only have a few clients, so if more than one wants to wait until the new financial year before paying us, it can really knock us out – this happens more than you think, there have been a couple of years when no-one has paid us until April!” The firm has an overdraft facility with HSBC for such an eventuality, though it has also built up reserves which, says John, can fund the business outright for three months. “Wherever possible we try not to use the overdraft because it can get expensive, but it’s a good safety net for if we ever need it.

The other key area for the company is insurance. “We’re an employer, so we have to have employers’ liability insurance, and we also protect our equipment with a contents policy. But because we operate recruitment and training schemes, there is the possibility of huge legal claims – we haven’t had anything of that nature, thankfully, but we make sure we have the right insurance policies in place if ever there was a claim.

The future

Government cuts could have a major impact on ANDS, but any impact is yet to be felt. “We know that local authorities are cutting services and freezing recruitment,” says John, “so we have to prepare for that.” Because the length of the average contract is so long, the company still has plenty of business but they are keeping control of expenses and looking for new avenues. “A year or so ago, we started looking at what we could offer the private sector – perhaps recruiting and training security guards or other, similar, levels of staffing. We also don’t do a lot of training for people who are already in employment and that’s an area we should explore.

“But really it’s about keeping the contracts we have and keeping the costs down. One of our staff is due to leave just before Christmas as she is moving away from the area, and we’ve taken the decision not to replace her straight away. We’re going to batten down the hatches and ride out the storm – it’s better to survive than try too hard and lose the business.”

This month’s questions were answered by experts who are part of the Aspen Waite Business Network, which is headed by Paul Waite.

Question:

We are a relatively new business, having traded for about 18 months. Our cashflow is good, and our income is rising. We want to look at expanding the business at the beginning of 2012, but we’re concerned about getting finance – we’ve always paid our bills on time and have a good relationship with our bank, but we’ve been warned that our credit rating isn’t good enough because we’re not established enough. Is there anything we can do to improve our standing?

Answer:

Most importantly, we can’t create a good business history where there hasn’t been a history at all. All that can be done is to minimise the impact of any other adverse factors. However, you do have some ways to improve your situation:

• Keep your bank manager in the picture, and let him have a properly prepared business plan showing performance with and without the proposed expansion, so that he is prepared for any formal request for finance, and can let you know his thoughts along the way. Avoid him getting any unpleasant surprises. Adopt a realistic approach to finance i.e make the bank managers job as easy as possible to support you.

• Build up funds so that you can put up a chunk of any expansion costs yourselves.

• Keep your credit record as clean as possible by paying on time, resolving disagreements before any possibility of Court action. Deal with any perceived risks from the business plan.

• Consider alternative sources of funding – HP or leasing of assets (even existing assets), invoice factoring, equity in own home. Be prepared to consider equity involvement from family and friends, joint ventures with customers or suppliers, business angels, etc.

• If it is clear that your bank will be unable to help when the time comes, keep your accountant in the picture and ask him for an introduction to someone that he thinks may be able to help. Be well prepared, well organized and well advised in advance of making any formal application.

• If at all possible when setting up the company create a decent amount of fixed share capital even £10k would help. If loaning money to the company consider subordinating the debt.

• Prepare full accounts with good disclosures and file the accounts quickly.

Question:

Following an extremely expensive problem with a difficult employee, who has now left the company, we’re concerned that our business can’t afford another HR nightmare. We’re a business of five people, we don’t have a personnel manager or anyone with any expertise in employment law. Can you give us some pointers on how to avoid staff issues in the future?

Answer:

The first thing is to have in place a written employment contract and a few basic
policies (disciplinary and grievance, family friendly policies) to go into a staff handbook. Employees have a legal right to written particulars but these agreements can also help protect your business. For example, it can be useful to have a contractual clause that allows you to put an employee on garden leave in the event of a dispute. It can also be beneficial for you to be able to make a payment in lieu of notice. Likewise, a written contract can include restrictions on what departing employees do next. This can be particularly important for a small business if the departing employee has a sales role or is close to your clients. Having in place post termination restrictions, in the employment contract, can deter and prevent a departing employee from not only leaving your business but taking your clients with them!

Secondly, make use of available free sources of advice. The ACAS website is a goldmine of information. It is designed for people like yourself who may not have knowledge in employment law. On their website are comprehensive guides on how to, for example, manage a situation if one of your staff is pregnant. Download and print their guides out. They are written in plain English and should be straightforward to follow. Of course, there may still be occasions when you need legal advice, but if you have a basic understanding first, then you will be asking specific questions which will save you time and money.

Finally, remember that your staff are your biggest asset. Work to engender an open, supportive culture where people feel they can voice any concerns they may have in an informal setting. Don’t be so busy running your business that you’re not available for those you rely on! Consult with your staff regularly and involve them as much as you can in decision making. For example, develop with them a mission statement for your business. This could help give them a sense that they have a say in what happens and will engender loyalty. As far as you can, confer on your staff autonomy over their work. This has been rated as more important to job satisfaction than pay. A lot of employment law is about treating people fairly. So if you treat people fairly, in an honest and consistent manner, you are likely to stay on the right side of employment law.

Question:

We’re currently trading only with UK clients, but we’ve identified a couple of markets in Eastern Europe (particularly Ukraine and Moldova, to start with). We don’t have any experience in international business – we’re concerned about not getting paid, about product liability – we manufacture materials used in the construction industry and we’re worried that something we know nothing about will come back to haunt us. Is there any advice you can give us, or are there any organisations that can help us?

Answer:

Trading overseas is an obvious and often necessary way to expand sales for any business, but many companies fail to understand that it can be very different from trading at home and that each market has its own rules and culture. As with anything, many of the potential problems are very obvious to somebody that knows the market but all too easy to fall into if you do not know they are there.

As a starting point, the British Embassy commercial section and the chambers of commerce in the target country can be good sources of information. Often there are Chambers of Commerce linking the UK to other markets as well as the local chambers in the UK and your country of interest. But do not forget to ask either your own bank or another international bank with representation in country.

The Embassy and the Chambers of Commerce should be able to help answer basic questions regarding trading terms, insurance and other such questions and can also point you in the right direction of other, more specialist help, but in reality the quality of advice can vary greatly from one place to another. Some can be very good indeed.

If the individual sales are larger in value, then using L/Cs and other forms of trade finance can greatly reduce risk but it is often advisable (although not always commercially possible) to ask for payment with order at least for the first few sales to any particular client until a track record has been established. Again, ask your bank for details of this. And do not forget the potential of currency risk – what currency will you sell in and how exposed will you be to exchange rate fluctuations? It is probable that for Ukraine and Moldova you will settle on pricing in Euros but of course this is negotiable on a client by client basis. With countries like Ukraine and Moldova (and the whole of the CIS region) the business culture is very different and it is crucial that you have a very clear understanding of what terms have been agreed. Double check that both sides mean the same thing. Communication can also be more difficult as it is the culture often to only reply when it is possible to say ‘yes’ rather than responding quickly or by a given date as is the norm in the UK. It can often be the best way forward to work with a local partner that can act as your sales agent in the new country.

In addiction to knowing the local market and other potential buyers of your products this can help with any language problems as well as helping to smooth out the communication and other cultural differences. The right agent would also be able to advise you about product liability and other issues although these emerging markets are not as litigious as the UK. It is of course crucial to work with the right agent. Construction is set to boom in all of the markets in the region as they continue to emerge and play catch-up with the west so if you get it right in these markets it can be very good. Just do not think that it will be the same as trading with the UK or indeed other more developed markets.

The gradual phasing out of cheques across the global economy and the desire amongst businesses to keep a closer eye on spending and record keeping should mean that payment cards – across all products – should be an ideal way of allowing key staff the ability to fund their expenses as they go about their business.

As a low cost and easily managed service, they are easily scale-able and can be tailored to each individual business’ requirements.The small business sector has often been amongst the early adopters of new technologies and financial service concepts, where the costs are acceptable and the benefits clearly identifiable. The development of the early telephone banking schemes targeted at the business sector and the adoption of first generation online delivery channels are two such examples.

And now it’s cards. Whether you want just an easy way to pay, or the option of a few weeks free credit, or even the opportunity to pay off larger purchases over a flexible period, payment cards may be for you. Below, we list the different types of card available, but essentially they fall into three different categories.

The first is a debit card. It works in the same way as your personal debit card – every time you use it, the money is automatically debited from the account to which it is linked. If you don’t have any money in the account, you may get the transaction refused. There’s no credit, no time to pay.

The second is the credit card, again the same as a personal credit card. Any transactions will be put on to a balance and you’ll have a set period in which to pay off the balance before you incur any interest fees. If you don’t pay off the full balance by the set date, interest rates will be charged. While credit card interest rates are usually higher than most other borrowing costs, they are also much more flexible, allowing you to pay off as much or as little as you like – provided you make the monthly minimum payment – according to your cashflow.

The third is a charge card, which are available although less common for personal accounts. Like a credit card, the transactions are moved in to a single account, for which you will be billed, usually each month. This bill needs to be paid off in full; it is not a form of credit and if you don’t pay it off in full, you’ll be stung by some hefty fees, as well as possibly seeing your company’s credit record damaged.

The business card

‘Business card’ is a generic term used by the payment system organisations,and the principal function of these products is to provide a service to the SME business sector. A range of added-value features and benefits are available through either the payment system organisation or through the card issuer. These might include extended warranty, legal referral services, supplier discounts, etc. MasterCard’s Europe Business Exclusives and Visa’s Savings for Business programmes are examples of how the payment system organisations have been able to use their power to negotiate a wide range of discounts for cardholders at a variety of merchants. In common with the other commercial plastics, this type of product also offers the potential to simplify the associated administrative processes.

The online debit card

This product is designed to work solely with an online environment where all transactions are subject to authorisation. Facilities such as these might be made available to employees to provide them with access to cash from the business account via an ATM or to allow them to make purchases from selected retailers. The product is particularly suitable for new businesses or those new to credit, whether they hold a bank account or not. The card can also be issued safely to businesses that have a sub-prime or badly impaired credit status. The deferred debit or charge card Whilst the statement arrangements may vary, this product allows the payments made with the card to accumulate between billings. The total of the amounts charged to the card is then submitted for payment or electronically debited to a predetermined account.

The travel and entertainment card

These products are now available from all of the main marques and can offer many important benefits to small businesses, including:

• cashflow management;
• improved analysis, budgeting and control;
• the inclusion of the potential to identify cost savings through negotiation;
• the ability to police compliance with travel policy;
• improved management reporting of travel expenditure.

The level of management information provided by T&E schemes has been an historic strength of this type of programme. Additional benefits typically include reward schemes, travel, car hire and baggage insurance with a level of emergency support services.

The revolving credit card

This card directly emulates the credit lines available to personal sector clients, and might typically carry a similar tariff and other product features. It carries a full credit risk, determined by the line made available to the cardholder, and pre-qualification will be necessary before such a product can be issued. This card may be issued in the name of the business for many different purposes. It may be carried by employees in order to ensure that they can draw on an account for which the company is responsible when they need to make disbursements or acquire cash.

The executive business card

Such products are issued as either debit or credit cards according to the strategy of the issuer and their availability through the respective payment system organisation. They enjoy more distinctive designs and appropriately higher product specifications. They may be issued as Gold, Platinum or Black, and may enjoy the advantages of the highest products within the provider, eg, Infinite, World Signia. The products are targeted at customers of the highest standing, and carry a portfolio of mandatory benefits specified by the marque, such as concierge service, in addition to optional extras added by the issuer.

Fuel cards

Those businesses that spend a lot of time on the road are more than well aware of the growing fuel costs they are having to suffer. And if you have staff who regularly need to fill up at the petrol station, they may not be so keen to simply buy the fuel themselves and then claim it back. These card services are often normally associated with larger organisations, but they also have a valuable role to play for the small business.

The lodged card

If your business regularly uses a third party to source products and services for you – for example a travel agent to arrange regular business travel – it may be worthwhile to provide that third party with its own credit card in your name. These are known as lodged cards – it’s your card and your responsibility to pay the balance, but you won’t ever use it to make any payments. While you need to trust the organisation you log the card with, this card can prove a very useful way of keeping track of certain types of expenditure, while giving you the convenience of knowing that the products and services you need can be easily sourced. Unless you’re expecting to have a huge balance to clear every month, youcan just use a normal credit card, but there are some specialist lodged cards products that are designed specifically for the purpose.

The ‘Top 5 tips for reducing energy bills’ is brought to you in association with Make It Cheaper.

Make It Cheaper is the UK’s leading business price comparison and switching service, handling over 2,000 enquiries a week. It provides its customers with impartial, comprehensive and free information about overheads such as business electricity and business gas helping you to switch suppliers and making sure you are not caught out by the small print.

What many businesses are waking up to is that there is no such thing as customer loyalty with energy suppliers and by staying with one company from one year to the next you’ll end up paying higher rates. With 11,000 different business energy tariffs ranging threefold in price switching once a year is the only way to stick on the better rates. Here’s are some tips to help you.

Establish Contract Status

• Call your supplier to clarify your contract status, the unit price you’re paying and the date of your next renewal period. It’s actually better for a business to be in a contract than not. ‘Out-of-Contract’ rates are the highest rates you will ever pay. So, for example, if you’ve just taken over new premises but not contacted the suppliers, you will be clocking up a massive account.

Shop Around

• Don’t accept a new contract with your incumbent supplier until you’ve compared prices. If you don’t have time to call your existing supplier or potential new suppliers try a business price comparison service who can tell you immediately if your rates are competitive and if not, do the legwork of finding out which is the best deal for your business (based on postcode, credit score and consumption).

Check Renewal Dates

• Once on your on a contract, make a note of your renewal dates and what notice you need to give as many suppliers make it difficult to switch towards the end of a contract. Each supplier has different rules with renewal ‘windows’ closing long before the end date. Miss your window and you’ll automatically be ‘rolled over’ for a year on uncompetitive rates.

Serve Notice Regardless

• Not everyone has the time or patience to keep a track of when their contact is up for review. The best way to get around this is to send a notice letter irrespective of how long your contact has to run. You cannot be cut-off for doing this and given that your current supplier knows your switching intentions, they will be more inclined to offer you competitive rates at your renewal.

Sign-up For Help

• For those in any doubt about your existing contract(s) or just looking for an easy solution, Make It Cheaper offers a free contract checking service that deals with suppliers on your behalf and contacts you with the best rates available when it’s time to switch.

For more information please use our contact form and speak to Make It Cheaper today.

With investors feeling wary in the aftermath of the economic crisis,
Aviva believes it could have the answer for you and your clients.

The banking and global economic crisis of recent years has left many investors with shaken confidence and a dilemma to face.

Leaving their money in – or bailing out into cash might be the safest option, but it won’t provide much of a return as long as interest rates remain low. If they invest in the stock market, on the other hand, they could see much higher returns. But it could prove disastrous if the markets take another dive.

“Some investors are understandably feeling a little insecure and unsure of what to do for the best,” says Richard Kelsall, Aviva’s head of bonds and savings. “Traditional savers may be feeling disappointed as they see their savings fall behind the rate of inflation. However, while they appreciate that equities could help them do better, they may not want to risk their capital.”

So the question many investors may be asking of their advisers, then, is: “How do I protect my money but at the same time get any sort of meaningful return?”

The Guaranteed Selection

Aviva is launching a range of funds it hopes will provide the answer. The funds will be available via Portfolio, Aviva’s investment bond where the minimum investment is £5,000.

The provider’s new ‘Aviva Guaranteed Selection’ is a range of three investment
funds – named Guaranteed 80, Guaranteed 90 and Guaranteed 100 – that come with a built-in guarantee. This guarantee acts as a safety net, so if the fund doesn’t perform well, your client will still be able to get a certain percentage of their original investment back on the fifth anniversary (minus any money they’ve withdrawn from the fund in the meantime).

“Our Guaranteed Fund [which is being renamed Guaranteed 100] has been a huge success since it launched in 1995, with more than 300,000 people invested in it” adds Kelsall. “This new range will build on that success and give investors greater choice along with the peace of mind that a guarantee brings.”

The level of guarantee included with each fund increases or decreases according to the level of growth potential the fund offers. So, of the three funds, Guaranteed 80 offers the highest potential for growth and correspondingly, the lowest level of guarantee – 80 per cent of your client’s original investment.

Guaranteed 90 offers lesser potential for growth and a higher guarantee of 90 per cent. And the Guaranteed 100 fund offers the highest level of protection at 100 per cent money-back and will have less growth potential than the other two funds.

All of these guarantees apply at the fifth anniversary of your client’s investment
Kelsall: Traditional savers may be feeling disappointed as they see their savings fall behind the rate of inflation and assume they don’t withdraw any money from the fund during the five year investment period.

Apart from Guaranteed 100, and at the fifth anniversary of each fund, the value of the customer’s investment will fluctuate and they may not get back what they invested.

Special benefits

A major selling point of the funds is that investors can switch between the funds at any time. This opens up two interesting possibilities for clients: first, the ability to ‘lock-in’ any growth they’ve made, and second, the ability to improve growth potential whilst maintaining a guarantee of a certain amount of their original investment.

“Because investors can switch between the funds so freely, they can ‘lock-in’ any
growth they’ve made,” says Kelsall. “So, say a client’s investment in the Guaranteed 90 Fund has been performing particularly well. They can choose to switch to the Guaranteed 100 Fund in order to effectively lock-in any growth, safe in the knowledge that they’ll be able to collect at least this amount five years after they’ve made the switch.”

Similarly, if a client invests, say, £10,000 in the Guaranteed 100 Fund and sees their investment grow by £1,200, they could switch into the Guaranteed 90 Fund. By doing this, they’ll still be guaranteed to receive at least their original investment five years on from the switch (90 per cent of £11,200 being just over £10,000) but invested in a fund with higher growth potential.

“These funds are designed to appeal to a wide range of investors, and provide
real prospects for growth coupled with a reassuring guarantee.

With investors facing difficult decisions about where to put their money right now, we believe the Guaranteed Selection will enable advisers to point their clients up the right path.”

For more information about Aviva’s Guaranteed Selection, speak to your Aviva
consultant or visit aviva.co.uk/adviser.

*The guarantee is reduced in proportion to the number of units cancelled and not the cash amount withdrawn.

Start-ups are missing a trick by overlooking their credit profiles, says Experian’s Simon Streat

2.5 million people in the UK currently out of work, the interest in starting up a new business has increased significantly, regardless of their business expertise – or lack of.

Of course, while setting up a new business is certainly easier than ever before, a myriad of factors must still be considered, irrespective of whether you’re
a savvy entrepreneur or you’re setting up shop for the first time. Prospective
business owners are required to pay great attention to selecting the best location for their venture, finding reliable suppliers, recruiting skilled and motivated core employees, choosing a supportive banking partner and seasoned legal representative, as well as making many more critical decisions that will shape the future course of the business.

However, all-too-often, addressing the new firm’s credit profile is not included
on this key priorities list, despite the fact that it could affect a company’s ability to win contracts or secure a lease, causing all manner of issues.

Firms with weak credit ratings will find that suppliers are sceptical of their ability to pay their bills, and thus either refuse to do business with them or enforce stringent payment terms. They will also struggle to attract new customers, as the low credit rating will raise doubts about the long-term viability of their business. Finally, they will struggle to attract new sources of finance, as lack of information about a business means there will be a greater level of risk for lenders to take.

The more information that is available about a business, the better position it will be in with regards to its credit status. However, by the very nature of a start-up business, there will be very little information available. This is why it is
essential for newly formed businesses to understand their credit status and make it a key priority, so that they start off on the right foot.

As a consequence, it’s little surprise that Experian analysis into new businesses shows that less than five per cent of start-ups ever go on to deliver consistent, rapid growth – while up to 40 per cent of new companies will typically shrink or cease trading altogether within three years of formation. Therefore,whilst having an innovative idea or identifying a market niche is undoubtedly important, customers, suppliers and finance are the things needed to get a new business off the ground.

In contrast, the small handful of startups that manage to overcome these initial

hurdles are likely to be the ones that take a proactive approach to credit, considering the issues and possible implications upfront, and taking the necessary steps to ensure their business is visible, so that they receive the healthiest possible credit rating.

Credit ratings typically start with assessing the directors themselves and their history of previous business ventures. If you’re starting up for the first time, it may be advisable to try and find a partnering director. Even more advantageous would be if you were to partner with a director that has previously experienced start-up success.

Experian analysis has shown that businesses started by two people or more
have a greater likelihood of survival than those businesses with one director. Not only will you to benefit from your partner director’s previous experience, but it will also positively impact the new business’s credit score.

When looking at suppliers, there’s no doubt that small firms need to try and secure the best possible deals on business essentials such as utilities, telephone and banking, yet because they don’t yet have a credit history, this can set them at a disadvantage from the beginning.

So what can be done?

For start-ups, it makes a lot of sense to ensure your business is registered with a directory, such as Thomson or Yell, but also to approach credit reference agencies proactively. They need to make sure their credit line is in order before they start making purchases, and should give serious thought to building their credit profile at an early stage so that they can secure the terms they want with suppliers.

As your business gets going, it may also be worth trying to encourage suppliers to provide feedback and share data on how your payment records are seen externally, to assess whether your business is being represented in the best light.

Ultimately, at any stage during a firm’s development, the more information there is in the public domain about a business or provided to credit reference agencies, the greater the likelihood of a more accurate credit rating.

For a start-up, where the chances of failing are already higher than more established firms, this type of pro-activity could make a big difference in ensuring the business starts off on the best possible footing.

Simon Steat is managing director of SME, Experian UK & Ireland

Redundancy was the impetus for John Walls to set up his own business, and he says it’s one of the best decisions he’s ever made.

“I worked in IT support for a bank and when the financial crisis started to bit in late 2008, the writing was on the wall.

“Everyone in my department was warned that we may lose our jobs and we were invited to apply for voluntary redundancy. We had a few months where we could make up our minds and that time gave me the chance to research the market and see if it was worth going out on my own.”

John’s idea was to provide IT support to small companies. This would range from setting up a single PC in an office to managing and hosting websites, to building networks in smaller companies.

“As I knew from my own experiences, even larger companies were getting rid
of their in-house IT support and smaller companies would never be able to afford an expert of their own,” says John.

“There are lots of companies that provide IT support, but my idea was that I would do so only in my town, so that I could visit the sites quickly and put my face about to ensure everyone knew who I was.”

While John was still working, he approached friends who ran businesses
in his home town of Stirling. “I wasn’t really pitching for work at that time, I was
just trying to see what sort of competition there was and what I could offer that they didn’t.”

Two main themes came from his research. The first was that the smaller businesses considered their IT as an afterthought – they didn’t really plan
for what they needed, they just bought equipment on an ad hoc basis without any forward planning.

“So my initial thought was that I would offer a free service where I could review a company’s set up and then offer advice on what they were missing out on and how they could develop their infrastructure going forward. I would look at what
they bought, the software they used, any external services they paid for and so on.”

The second issue that the smaller companies had was call out charges. “They
often got very frustrated with the telephone support they received, but because call outs cost so much they were reluctant to use them if the problems were fairly minor.

These guys are generally not computer experts, so if they had a problem with
something like their email, they didn’t know how to fix it. So I decided to have
two pricing structures – the first was on a pay as you go basis, while the second was for a low monthly contract.

“Big firms tend to have contracts with their IT support, but it’s less common with small businesses who may only have a couple of basic computers.

“This actually worked really well, because I would go into the business to do
the review and then I would know where the issues were. So I’d do a small monthly charge and then spend a lot of time getting everything working exactly right, so there’d be fewer problems down the line.

It meant that if I signed a contract for the year, there would be a lot of work upfront and then the plan would be that everything would work smoothly from then on.

My other idea was to get a relationship with one major supplier and try and get a
bulk discount on all the IT I bought and then pass on the savings to my customers.

I don’t take a cut from this, it’s part of the service contract, and it can mean that my costs are actually lower than the savings they make on their purchases.
Start up costs John’s start up costs were actually fairly low. “My employers had paid for me to take all the necessary courses over the past few years, so I was already up to date on all the certification,” he explains. “I thought that to get started all I would need was a good computer system at home and a car, and I already had both of those. There would certainly be further costs down the line, but nothing too high upfront. “I put about £3,000 of my redundancy money into the business – to pay for setting up a limited company, creating a website
and printing some stationery. But that all came in at under £1,000.

The most important thing was to get my name out there. So I nagged all the people I knew to give me a chance and then I went round to all the other businesses in the area to offer the free review. I was lucky in having a financial cushion from my redundancy so I didn’t need to start earning a lot of money very quickly – I didn’t earn very much for the first few months, because I was offering the low cost monthly contracts and you need a lot of them to make a living, but we’ve been going for two and a half years now and business is good.

Financial products

John’s financial requirements are also petty simple. “I got a business bank account with HSBC, simply because that was the bank I had my current account with and it’s never caused me any problems.

“I just took the basic business account – most of my clients pay me electronically and I don’t have too many outgoings. It offered free banking for the first 18 months, but because I’m not using it for overdrafts or cheques or anything like that, I still don’t have to pay much – it’s a couple of quid a month, if that. To be honest, I rarely go into a branch or speak to anyone from the bank – I do all my banking online and my finances are fairly straightforward – one account for the day to day banking, and another for the VAT Man.

“I don’t run an overdraft but I do have a business credit card. I only use this when I’m buying a lot of equipment from a client – my supplier gives me 30 days credit on anything I order, but sometimes clients can take a little longer to pay up! Because I always clear the balance straight away, I’m seen as a good risk and my credit limit has gone from £1,500 to £15,000 in two years.”

Because John is based at home and uses his own car to visit clients, he didn’t
need to take out much more in the way of insurance. “I told my home insurer that I ran my business from home, which didn’t affect the premiums – they seemed quite pleased that I would be home more during the day! My car is insured for me to use it for business purposes anyway, because I used to have to drive for my job, so that has had no impact. The main insurance that I have had to buy is a liability policy.

I’m unlikely to do much physical damage with my business, but there’s always the danger that I accidentally delete a client’s entire system. Touch wood, I haven’t had any accidents like that, but not only does a policy like this protect me, it also provides reassurance to my customers.

What next?

“The IT requirements of companies are always changing. Even though this
business is new, the sort of work I am doing now is very different from what I
was expecting when I started.

“I do much more work with firms who have people who aren’t based in the office. Sometimes that’s making sure their Blackberries are connected to the server, sometimes it’s about setting up a home office or preparing the network to allow access from remote locations.

“I’ve been working in IT for nearly 30 years and I’m pretty experienced. But I
know I have to keep up with the latest developments to ensure I can continue to
offer the best service to my customers.

“This is always going to remain a one-man business,” adds John. “I’m 51 now
and I don’t have ambitions to take over the world. But it’s providing me with a good living and I enjoy it – I like the work, I like my customers and I like the flexibility that means I can take an afternoon off to go and play golf whenever I feel like it!”

Innovative companies have the opportunity to gain tax relief for their research and development budget, writes Paul Waite, partner at Aspen Waite

I have been fortunate to work with a number of outstanding innovators over
a period of more than 20 years. As a nation we enjoy an enviable record for
invention and I am pleased to report that the tradition is as strong as ever.

Over recent years UK tax legislation has increasingly attempted to recognise and reward businesses for investing in research and development activities that prove to be of commercial benefit.

The next big step will be to encourage UK innovators to trade in the UK by reducing the corporation tax rate for qualifying companies to 10 per cent! My experience is that usually entrepreneurs are unaware of the relevant R&D tax credit legislation and it is an area that many accountants and tax advisors seem to steer clear of. I lay out below a brief synopsis of the current legislation incorporating details of recent changes.

Research and development relief is a corporation tax relief that may reduce your company or organisation’s tax bill by more than your actual expenditure on allowable R&D costs. For small or medium sized organisations you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs.

For the purpose of this article we are focusing on R&D relief for SMEs only. One can claim R&D relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.

This is an important definition and often it is necessary to seek advice. For accounting periods ending before 9 December 2009, the project must satisfy both of the following conditions: company or organisation’s trade – either an existing one, or one that you intend to start up based on the results of the R&D.

• If your company or organisation is claiming relief under the SME scheme it must own any intellectual property that might arise from the project. For accounting periods ending on or after 9 December 2009, only the first condition applies because the second condition has now been abolished and won’t apply to relevant expenditure for accounting periods ending on or after that date. This is an important and very helpful amendment.

Relief works by enhancing deductions from taxable profits

The rate of enhancement will depend upon when the expenditure is incurred. If incurred up to and including 31 July 2008 expenditure is enhanced at a rate of 50 per cent, if incurred on or after 1 August 2008 it is enhanced at a rate of 75 per cent.

The Chancellor announced in his budget on 23 March 2011 that subjected to State Aid approval the rate of SME R&D Relief will increase from 75 per cent to 100 per cent. Once approved, this increase will apply for expenditure from 1 April 2011.

Subject to State Aid approval, the rate of SME R&D Relief will increase to 125 per cent from 1 April 2012. If your company makes a loss, you can choose to receive your tax relief by way of tax credits – a cash sum paid to you by HMRC – if your company or organisation has PAYE and National Insurance contributions (NIC) liabilities for that period.

The amount of tax credit you can receive is limited to the total of PAYE and NIC liabilities for that period. But it includes liabilities for all directly employed staff – not simply those working on the R&D project. The Chancellor announced in his budget on 31 March 2011 that this limit will be removed for expenditure incurred on or after 1 April 2012. Again this is a very important step. In my experience many outstanding innovators cannot afford to be remunerated at anything like a commercial level or indeed employ staff.

Example – converting R&D Relief on expenditure of £20,000 to a tax credit payment

You cannot claim R&D Relief under the SME scheme if you are a subcontractor – that is, if you have been subcontracted to do the work on behalf of somebody else. But, even if your company is small or medium sized you may still be able to claim as a subcontractor under the large company scheme, see HMRC website for more details on this.

Which costs can qualify?

• Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company or organisation – not consultants, agency workers or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors.

• Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaging in carrying out R&D. The staff provider needs to contract with the individual whose services the supply – not through another person.

• Materials – consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D and not things like telecommunication or data costs. Material costs are not allowed if they end up in a product that is in itself sold.

• Payments to clinical trials volunteers – the cost of relevant payments to subjects of clinical trials.

• Utilities – power, water, fuel used directly in carrying out R&D but not things like telecommunications or date costs.

• Software – computer software used directly in the R&D.

• Subcontracted R&D expenditure – if your company or organisation is claiming relief under the SME scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor. But if the subcontractor is connected to your company of organisation, or you have jointly elected for connected parties treatment, special rules apply. If your company or organisation is not SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.

Capital expenditure

Although R&D Relief is only available for ‘revenue expenditure’ (generally day to day running costs, as opposed to capital expenditure), if you are involved in R&D and you spend money on assets you may be able to claim R&D capital allowances.

Amount of expenditure

Tax relief is only available if your company or organisation spends at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. The Chancellor announced in his budget on 31 March 2011 that this limit will be removed for expenditure incurred on or after 1 April 2012. There’s an upper limit of £7.5 million on the total amount of aid you can
receive on any one R&D project.

When to claim

You must make any claim for R&D Relief in your company tax return or amended return. The normal time limit for making your claim is two years after the end of the relevant corporation tax accounting period.

How to claim

You claim for R&D Relief by putting an X in either Box 99 (SME) of your company tax return and put the enhanced expenditure in Box 101 – that is; the actual amount spent multiplied by 175 per cent (or enhanced relief available at the time). You should also include this enhanced figure in your calculations of the profit (Box 3) or loss (Box 122) for the period.

If your company or organisation is a SME and you want to convert some or all of the tax relief into payable tax credits, you will also need to put the amount payable to you in Box 87, Box 89 and Box 143 – and don’t forget to put an X in the ‘repayment due for this return period’ box on Page 1.

I hope the above gives you a brief taster of the legislation.

paul@aspen-waite.co.uk.

One option for budding entrepreneurs looking to start out on their own is to use the support of an existing company by buying a franchise.

There’s no doubt it’s a tough environment for small businesses at the moment. As consumers, businesses and the public sector all rein in their spending, sales are getting tighter and margins smaller. One option for entrepreneurs looking for a safer bet is to buy a franchise. Opinions vary on the benefits of franchise, but those who support the concepts suggest that business franchises are far more likely to succeed than standalone start ups.

Choosing to go down the franchise route is a big decision – it’s usually a big
commitment in both time and money, and can mean starting up is more expensive than for a business that’s your own idea. But in return, you may receive one-to-one support, national marketing, bulk discounts
on products and quality supply lines.

How it works

Here, a franchisee, an existing successful business, effectively licenses that
business to the franchisor, a third party.

This franchise gives permission for the franchisor to operate that business in a
specific location and use trademarks, marketing materials and perhaps some
of the back office management to help the business grow. Training is usually
provided, and depending on the business, you may also be given a customer base as part of the package.

The benefits for the franchisor are that their business grows, but the risk for that
growth is passed on to the franchisee, and they get an income as a result of the
success of the company as a whole.

But of course, you remain in control. It’s still your business, and you’re responsible for its growth – you decide when you’re open or available, whether to hire staff, which bank account you need, whether you need commercial finance, which insurance provider to choose from, and so on.

The types of business available for franchise are massively varied. The British
Franchise Association (BFA) lists over 200 companies, and there are many more that are not members. The most well-known types of franchise are household names; the likes of McDonald’s and many of the country’s larger estate agencies have longstanding and successful franchise operations. But there should be something there to suit your requirements – from
health care, to trades to technology.

The costs

When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account.

Initial costs

The franchisor – the business that sells you the franchise – usually charges an up-front fee. If the franchisor relies mainly on taking a percentage of your sales revenue, rather than on a high initial fee, it is usually a good indication that they have confidence in the value of their product or service.

Your largest initial costs are usually your investment in:

• premises
• equipment
• initial stock

You will need to establish a business entity. Although a franchisee holds a
contractual agreement with the franchisor, each franchisee is an independent business – and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader – each of which will involve different costs -
or your franchisor might have specific requirements.

The amount you pay varies according to the franchise, and what you get for it. Some of the most well-known franchises have start-up fees that run to tens of thousands of pounds, while others get you going for a few hundred. The cost will depend on the value of the brand, the amount of trading, the competition for franchises, projected incomes and a number of other factors. It’s a case of asking the companies you are interested in for a breakdown of their charges and full details of what they provide in return. Usually you will be responsible for premises, utilities and depending on the landlord insurance that already exists, most of the costs of keeping your business running will also fall to you.

Continuing costs

You usually pay a percentage of the sales revenue to the franchisor by way of a
management service fee. Alternatively, you may pay a fixed management fee.

Under the terms of the franchise agreement, you may have to buy stock
from the franchisor. Check what they charge. They may mark up the prices – or
they may be able to offer them to you at a discount because of their buying power.

You also have to pay the usual business costs – for example, rent for premises,
utility bills or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.

Remember, though, that just because it’s a franchise, it’s still your business and
you have to take responsibility for it. This means that you need to make sure your staff are paid, your taxes are on time and your financial requirements remain down to you.

Advantages and disadvantages

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

• Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
• You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise.
• The franchisor gives you support usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchisor won’t sell any other franchises in the same territory.
• Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
• You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
• Relationships with suppliers have already been established.

Disadvantages

• Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
• The franchise agreement usually includes restrictions on how you can run the business. The franchisor might go out of business.
• Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough.
• You may find it difficult to sell your. franchise – you can only sell it to someone approved by the franchisor.
• All profits (a percentage of sales) are usually shared with the franchisor.

With so much focus on growth, all eyes are on small businesses to make it happen. The ability to find and acquire new customers is a key element in the growth process, but Experian’s research has identified this as one of the main areas of concern for small businesses.

Finding new customers can be a challenge, while finding profitable customers is another. However, businesses are operating in a riskier environment than they would have been used to in the early part of this century, and the biggest challenge today is finding customers that will continue to pay their bills.

Experian’s latest data on late paying businesses reveals the last two quarters of 2010 saw a deteriorating payment trend among businesses, while the first quarter of 2011 saw no signs of significant improvement as UK businesses continued to contend with challenging trading conditions.

While the largest businesses (500+ employees) remained the worst late payment culprits, smaller firms with three to ten employees – traditionally among the fastest payers – saw the biggest deterioration in payment performance as greater numbers struggled to pay their bills.

This highlights that the current threat of exposure to bad debt is a very real one. Businesses face reputational as well as financial risk when they target failing businesses. If you knew in advance that a potential customer wasn’t going to pay their invoice, would you still target that them? Would you still go after their business?

Small firms looking for new business clients should not simply target every potential prospect in their region without delving deeper into the impact those businesses could have on their own operations. Taking on the wrong kind of customers could have a negative effect on their own businesses and ultimately lead to its own demise.

While intelligent marketing information is still key to highlighting those prospects most likely to buy, credit risk information is just as important to show those that are most likely to pay. The financial losses and to failing businesses could well create a knock-on effect that causes their own business to fail.

Not every single business classed as risky will fail, as many will take some steps to change the path they going down.

So, the first step is to take them out of the equation. Through the use of marketing data that has been pre-screened against credit risk data, those unprofitable, high-risk businesses, including those that are likely to fail in the coming year, can be removed from an organisation’s databases and marketing prospect lists. This will enable small businesses to ensure their resources are more focused and effective. It will in turn reduce unnecessary expense marketing to unsuitable prospects and also help avoid the costs associated with expensive sales visits to small businesses that will end up proving costly in the long run.

However, while this can prove highly effective in avoiding the businesses most likely to fail within the next 12 months, it is only the first step. There is a more intelligent way of using pre-screened data.

Small businesses can use this data to delve deeper into the higher risk companies. By targeting them with payment terms and conditions that are more appropriate to them or by agreeing up front deposits before goods or services are despatched, businesses will be able to continue to take on new customers, but at lower risk.

It is worth bearing in mind that not every single business classed as risky will fail, as many will take some serious steps to change the path they are going down. By taking advice, reviewing current operations and adopting best practice, some of these struggling companies will manage to turn their fortunes around. However, until the business does turn itself around, it is still a risky prospect.

If the status of a high risk business later changes and it begins to grow, it could become a profitable customer in the future. Experian’s analysis shows that there is a lesson for all firms in terms of creating and enforcing robust credit management and collection policies so that companies do not leave payment to chance. Goodwill goes a long way in business relationships, but ultimately firms need to pick up the money that they are owed promptly or they risk encountering serious cash flow issues.

Content Source: Simon Streat. Managing Director of SME, Experian UK&I