Steve Parks

Well I have to admit to being a little underwhelmed by the Pre-Budget Report (PBR) that the Chancellor unveiled yesterday. I think it'll have little effect to be honest.

Most of it had been leaked in advance of course (why bother with the actual announcement when you spin every single element so much in advance?) so there were no surprises. And unfortunately I think the economy needed some positive surprises. The VAT announcement would have had more impact if pulled like a rabbit from a hat rather than slowly built up in advance.

But leaving the style of the announcement aside let's look at the details announced, and there are a lot of small bits of good news, even if there isn't one big great thing:

1. Struggling businesses will be able to spread their VAT, corporation tax and NI contribution payments over a longer timetable. This extra leniancy will help - but they're still going to charge interest, it's just the penalty fees that will be waived. If you are having cash flow issues and would like to defer paying your tax, contact the Business Payment Support Line on 0845 302 1435
2. The rise in corporation tax for small firms from 21p to 22p - planned for April 2009 - will be deferred. This was a daft idea in the first place, especially when combined with a tax cut for larger firms. But note that they've only deferred it.
3. Tax repayment scheme for previously profitable businesses will be extended so up to £50,000 of losses can be offset against profits made over last three years. So if you have been making a £10k profit for the last 3 years, but have made a £30k loss this year, you can claim back the tax you paid - ideal to help your cashflow now. A good move to help small businesses that are fundamentally healthy but have been affected by the recession.
4. £3bn capital spending is to be brought forward from 2010/11. This is a good move, but is mainly focused on the construction sector that has been hit particularly hard.
5. A new 45% higher income tax rate is proposed for earnings above £150,000 from April 2011. I'll put my head above the parapet here and say I support this. There'll be a lot of carping about it, but I think it's fair and a model like this has worked well in Scandinavian countries. Plus I don't think it will impact entrepreneurs, who mainly take their rewards as dividends rather than salary - so genuinely get rewarded for the profits of their successful businesses. This'll mainly affect just the kind of people that caused this bloomin' financial crisis in the first place!
6. The threshold for the Bespoke Retail VAT Scheme has been increased. Retailers with a turnover over a given threshold are no longer allowed to use one of the five published schemes, and are required to enter into a Bespoke Retail Scheme with HMRC. The measure increases the threshold from £100 million to £130 million - saving mid-size retailers a lot of time and money negotiating a bespoke scheme.
7. The rules for the flat rate VAT scheme for low turnover businesses have been simplified. The flat rate scheme is a simplification for small businesses to account for VAT on a flat rate percentage based on a benchmark for their sector. There are currently two tests to determine whether a business may use the scheme. The measure removes a second test meaning that eligibility to join the scheme will solely be governed by the taxable turnover of the business - which must be below £150,000. This makes the scheme more accessible and easier to join for small businesses, and can save admin time and money.

Then there are some moves that I'm not sure about yet:

1. A £4bn deal has been agreed with the European Investment Bank to provide money to UK banks to pass onto small and medium-sized businesses. I have to admit to being cynical about the banks passing the benefit of this onto clients without pocketing most of the advantages themselves.
2. VAT to be cut from 17.5% to 15% from 1 December 2008 until 31 December 2009. As mentioned in my post responding to the leaks, I'm doubtful about this getting passed down the chain properly, doubtful about whether it will lead to more sales, and doubtful about the actual benefit to VAT registered busineses (especially lossmaking ones!). However it may help the small non VAT registered companies if the reduction is passed down the chain by their suppliers.

And then there's the bad news:

1. From April 2011 all rates of National Insurance contributions are to be increased by 0.5% for all employees and employers. This is very unwelcome. Of course there had to be some way to claw back what he's spending now, but I think this will just penalise companies that are hiring more staff - which is just what the economy needs (and will still need in 2011!)

So, overall it's mostly good stuff, but it lacks that wow factor that I think was needed to give the economy a boost.

What do you think? Will this PBR save the economy? Will it affect you and your business? Click the title of this blog post to be taken to the full page for this post where you can submit your comment.

The Silicon Valley blogs have been buzzing over the last few days with details of a number of presentations and letters to hi-tech companies by their venture capital backers. These presentations were designed to inform CEOs about the outlook for the economy, and share the experiences and advice of the investors - all with the intention of helping their companies survive.

I'm going to summarise them here, because they give a very interesting and insightful perspective - and some great advice.

Sequioa

Sequia Capital is possibly Silicon Valley's most respected venture capital firm. They've backed many of the web's best-known companies from their first steps.

Last week they held a meeting for the CEOs of their investee companies - with the intention of delivering a short sharp shock.

Here are the slides from the presentation:

The analysis in here is fantastic - and well worth studying in depth. But the key messages are:

1. This is not a short term problem. Prepare for tough years rather than months. Don't expect bumper good times to return for 15 years.
2. You need to make sure your company is cashflow positive.
3. You need to cut costs (but smartly - my addition), reviewing salaries, using commissions and other performance incentives - and using zero based budgeting (more in a later post on this).
4. Focus on only the genuinely valuable and likely sales in your pipeline, get rid of the noise.
5. Spend every dollar as if it were your last.

Benchmark Capital

This VC firm has lots of similar advice, but it was particularly interesting to read them quoting a CEO they know who went through the dotcom crash...

Recently, I spoke with an entrepreneur who as a CEO during the dot‐com crash and oversaw a headcount reduction from 130 to 28 (through two major layoffs), and eventually back to profitability and an IPO. If you think a 10% layoff is tough, imagine laying‐off 78% of your employees. It is one of the hardest things I have ever seen anyone do. I recently asked him how that experience has shaped the way he ould advise people on running a startup. He had a list at the tip of his tongue (included now):

1. You don’t realize how fast things spin out of control. There are self‐reinforcing negative affects in a downturn.
2. Don’t spend money until you have to
a. Don’t move out of your office until you are sitting on top of one another
b. Don’t hire any incremental employee until you just can’t stand it
c. Don’t get more capacity in your data center until your site is going down
3. Better to be “late to the party” than to be early and run out of money
4. Line item review of the budget every month (legal, accounting, everything)
5. Not just a CEO mindset, but a company mindset
a. Everyone must buy into the process
b. But in a calm way - not run for the hills
6. Create 2 or 3 different burn scenarios - know at any point in time how many months of cash is left.

Ron Conway

And finally, angel investor Ron Conway sent these emails to the companies he has stakes in.

In summary

All three of these experienced investors give similar advice - essentially:
1. Cut costs wisely
2. Plan for this lasting a long time
3. Don't expect to be able to raise outside funding
4. Watch the cash flow like a hawk!
5. Act quickly

I'll be writing more blog posts soon about the economic situation and what it means for entrepreneurs in terms of threats - and opportunities.

Paul Graham runs Y!Combinator a special seed-fund/incubator for tech startups.

He recently wrote an article titled The Equity Equation in which he shares his idea for a simple formula for entreprneurs to work out what is a good price.

The formula is:

1/(1 - n)  read more »

In his ten years as Chancellor, Gordon Brown introduced many initiatives to encourage entrepreneurship, or expanded on existing programmes.  read more »

Here is a brilliant blog post in which an entrepreneur reveals the differences between their financial plan and financial reality, and explains the reasons.

Writing a business plan is so difficult because of all the unknown factors, and the fact it is so difficult to get benchmark figures from other businesses.  read more »

Equity funding and trading in Britain is about to take a step back in time - for the better.

In 1973 the regional stock exchanges in Britain were merged with the London Stock Exchange, but that step is about to be reversed in Birmingham, where the Regional Development Agency is set to open Investbx this summer.  read more »

How to Fund Your Business: The Essential Guide to Raising Finance to Start and Grow Your Business author: Steve Parks asin: 0273706241

Over the last couple of days some further details have been emerging about the small print behind the budget.  read more »

I was in London yesterday, and then meetings all day today, so I'm only now getting a moment to blog about the budget and my views about its impact on entrepreneurs.

I received the first headlines from news sites on my PDA as the speech was ongoing, but then, as soon as the chancellor sits down,the Treasury news-machine gears up and press releases start arriving by email with more details.  read more »

How to Fund Your Business: The Essential Guide to Raising Finance to Start and Grow Your Business author: Steve Parks asin: 0273706241

If you've read any of my books, particularly How to Fund Your Business, you'll know that I keep hammering home how important it is to manage and monitor your cash flow.

Cash is the fuel for your business - and you wouldn't want to be in a plane when it runs low on fuel. The same goes for your business.  read more »

One of the most common pieces of advice I give to the entrepreneurs I mentor, or the readers of my books I end up chatting to, is to charge more money!

It's amazing how common it is for owners of start-up businesses to undervalue the work they do.  read more »