Between 2016 and 2017, the turnover of digital tech companies grew by 4.5% – much faster than UK GDP, which grew by just 1.7%. At the same time, the number of jobs in the sector increased five-times faster than the UK economy, a mark of the high level of investment in the sector.
Although tech-led businesses are innovative by nature, fending off fierce global competition can be a risky and costly process. Currently, around 50% of start-ups fail in the first 12 months, and the sector is littered with examples of businesses that have failed to realise their potential due to funding issues, production difficulties, or a lack of market demand.
To improve their chances of success, business owners in the sector must take a robust approach to cash-flow management and forecasting. These aspects can help to cultivate business for success, allowing it to thrive over time. In addition, key investors are more likely to invest in a business which is structured in a way that will allow them to take full advantage of their investment and realise value over time. Accurate forecasting can also enable businesses to assess precisely where funding gaps might exist, so these can be addressed.
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Securing the finance necessary to invest in new products or services can be one of the biggest challenges for tech-led businesses, with some entrepreneurs turning to friends and family for financial support or taking on high levels of personal debt. Without the finance needed to develop make their proposition market-ready, it could end up being a flash in the pan.
Business owners should also make sure they are structured to take full advantage of any funding invested and take steps to de-risk activities as far as possible. Structuring the business with investors in mind and putting a tax-efficient structure in place can be crucial to success.
To encourage early-stage investment, organisations may opt to utilise schemes such as the Enterprise Investment Scheme (EIS), which allows for upfront income tax relief and for the tax-free disposal of shares, provided that they have been held for three years and other conditions are met. Whilst schemes such as this can be attractive to investors, businesses must familiarise themselves with the rules and ensure they are compliant.
When investing in innovative software or systems, or developing new products, it may be possible for businesses to offset this expenditure against its corporation tax liability by claiming R&D tax relief. R&D tax relief is a regime that rewards innovation and can lead to cash back from HMRC in the early stages of business. It is important to get the right advice in this area to ensure that any claim is made correctly and with the most optimal result.
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As well as maintaining a clear focus on current operational activity, businesses should have a strong growth strategy in place. Allowing room for growth, whilst staying focused on tax efficiency and cash management can be a difficult balancing act, and it may be worthwhile seeking external advice and support or appointing an experienced non-executive director.
To help attract and retain the right people, with the right skills-set and/or market knowledge, businesses may need to put in place a package of rewards and incentives. While growing organisations are unlikely to be cash rich, the offer of an equity share of the business may be appealing. Such incentives can directly align employee rewards to the success of the business, therefore aiding retention.
Creating a flexible and well-motivated workforce to support the growth plans of the business is vital. At a time when many businesses are concerned about skills gaps and talent shortages, tech-led businesses must strive to attract the best candidates; investing in the creation of a brand that will appeal to millennial job-seekers.
In a sector driven by innovation, business owners must structure their business for growth; ensuring it is backed up by a well-considered and well-funded business plan. The ability to attract and retain talented people and access to the right experience and expertise can also make the difference between success or failure.
Written by Stephen Hemmings, partner and head of the technology sector group at the accountancy firm, Menzies LLP.