UK: Enterprise Newsletter – Winter 2014

Unleashing British Business
Last Updated: 25 November 2014
Article by Smith & Williamson

SMITH & WILLIAMSON ENTERPRISE INDEX

Confidence holding steady among UK entrepreneurs

Guy Rigby considers what the latest Smith & Williamson Enterprise Index results tell us about the entrepreneurial engine of UK economic growth.

The Smith & Williamson Enterprise Index measures entrepreneurial confidence in the economy. Now in its second year, the initial benchmark was set at 100.

During 2014, our Enterprise Index respondents have maintained a higher level of confidence than they felt through 2013. The Index has remained in the 105- 109 range, with a closing reading of 106.2 in the third quarter of 2014. This shows a reassuringly steady level of confidence despite the Bank of England signalling that interest rates could start to rise later this year.

Mandatory living wage and boardroom quotas unwelcome

One of this quarter's questions considered the introduction of a mandatory living wage, based on the amount an individual would need to earn to cover basic living costs. Over half of respondents believe that the introduction of a mandatory living wage would adversely affect small businesses. However, arguments in favour suggest that this would help to increase the motivation, attendance and output of employees, who would spend more buying local goods and services.

The Index also found that the majority of respondents (62%) felt that the introduction of mandatory quotas to increase the number of women in boardrooms isn't the best way forward, with 18% remaining 'on the fence' about the issue. This reinforces a growing consensus that mandatory quotas would be counter-productive, undermining the perceived competence of women in relation to future board roles.

Empowering individuals as entrepreneurs

Somewhat surprisingly, half of the Index respondents felt that the emergence of the 'Sharing Economy', evidenced by the significant increase in peer-to-peer platforms and collaborative consumption, will have an adverse effect on their businesses. More positively, however, over 70% of respondents indicated that they expect their export turnover to increase in 2014. John Longworth, Director General of the British Chamber of Commerce believes that "we need to transform the domestic mindset of those businesses by creating an environment that makes it worthwhile for them to export".

A vote for the EU

Over 60% of respondents believe that the UK is better off inside the EU. Mark Hindmarsh of Versatile Connections, said "the EU is the UK's main trading partner worth more than £400bn a year... Staying in the EU means the UK is more likely to be in a position to win new trade deals as opposed to being an independent, outside EU player". The contrary view is that the UK and the EU would remain key trading partners irrespective of the UK's EU membership.

Conclusion

Following a period of prolonged uncertainty, it's encouraging to see a steady level of optimism returning among the UK's entrepreneurs. The findings on the Sharing Economy are particularly interesting, with many entrepreneurs appearing to fear the disruption this will bring. In this issue Enterprise welcomes Benita Matofska, a recognised expert and the founder of Compare & Share, who predicts its continuing explosive growth and encourages entrepreneurs to get on board.

THE ENTREPRENEUR REVOLUTION - UNLEASHING BRITISH BUSINESS

Key recommendations to oil the wheels of innovation for UK entrepreneurship

The 'Unleashing British Business' forum, hosted by Smith & Williamson in conjunction with Cubitt Consulting, aimed to provide a greater understanding of the issues facing UK entrepreneurs, as well as potential solutions. Our audience of experts discussed the landscape for entrepreneurs and formulated strategic recommendations for the Government. Here is a snapshot of our white paper.

Plugging the equity gap

Key recommendations:

  • Plug the information gap to improve awareness of equity options
  • Remove hostile or restrictive regulations and tax policies for families
  • Encourage equity providers to educate entrepreneurs

The UK needs to create a culture that doesn't inhibit entrepreneurs seeking equity. According to our expert panel, there is plenty of funding available to SMEs, but not enough information to help them understand their options. Education is key to understanding core business concepts and the Government should play its part by promoting basic business knowledge in schools and universities. Private equity and venture capital firms should also take a more proactive role in mentoring and supporting entrepreneurs.

A strong network of peers is another way to fill the information void. The Government should aim to ensure that those seeking equity are aware of investor networks and how to utilise them. The Enterprise Investment Scheme (EIS, SEIS) is helping to increase business angel investment in earlier stage businesses, but the benefits need to be communicated more effectively. The regulations surrounding these schemes can be complex and onerous, and should be simplified.

Family investment is a key source of equity for early-stage ventures and is often denied the benefits enjoyed by individuals who are 'unconnected' investors. More should be done to encourage this. At the same time, many established companies are now backing incubators and accelerators and making direct investment into early-stage businesses. The reintroduction of a Corporate Venturing Scheme by the Government would encourage this important form of investment, bringing wider benefits such as market access, back office services and mentoring.

"It seems complicated and serious to get involved with private equity and you shrink away from it because you don't want to be wrong."

Rupert Collingwood, Founder, The London Management Company

Making debt markets work

Key recommendations:

  • The UK must tackle a culture of risk aversion
  • Improve information channels between lenders and SMEs
  • Increase access to mentoring

Banks claim that while funding is available to strong businesses, many solid candidates are unwilling to take on debt and only a tiny proportion meet stringent lending criteria.

The UK needs to return to a more local and relationship-based form of banking in order to support entrepreneurs. Local savings banks in Germany – where rewards for managers are based on the economic performance of defined regions – may provide a good model for lending to SMEs in the UK.

Government schemes such as the Funding for Lending Scheme (FLS) and the Enterprise Finance Guarantee Scheme have been poorly communicated. SMEs simply don't know where to find unbiased advice and guidance.

"The UK banks... have been gobbled up by global banks, stripping them of their expertise in relationship management and leaving entrepreneurs without access to mentoring."

Director, leading family wealth office

The red tape challenge

Key recommendations:

  • Communicate Government successes more effectively
  • 'Name and shame' regarding company payment terms
  • Ease the burden of the public procurement process

The Small Business, Enterprise and Employment Bill is a welcome initiative to ease the burden of red tape, but it's vital that channels of communication between the Government and SMEs are improved. Recent reports suggest that MPs, even at the highest level, understand too little about entrepreneur-friendly policies.

A further recommendation is that public companies should be forced to publish payment terms and average payment times so that SMEs understand the level of risk involved. Payment periods of more than 60 days should be abolished as they create an unsustainable environment for SMEs.

'Lighter touch' regulation of hiring and firing by SMEs, allowing them to flexibly downsize in difficult times, would be a major benefit and keep many more businesses going. More supportive policies would encourage SMEs to take on more staff and self-employed people, in particular, should be encouraged to hire.

"The Government needs to focus on creating better red tape rather than more red tape."

Dale Murray, CBE, tech entrepreneur and angel investor

Tax policies for growth

Key recommendations:

  • Introduce low, simple, consistent tax rates to foster long-term commitment
  • Set long-term goals for tax policy to support SMEs
  • Champion the contribution of entrepreneurship to GDP and employment

The consensus of our forum was that low and stable tax rates and simple reliefs are essential to promote enterprise and innovation, benefiting society as a whole. Given the current Government deficit, it is suggested that the best way forward is to cut expenditure and raise indirect taxes, rather than direct taxes. The concept of a flat tax rate for entrepreneurs should also be considered to counter the issue of 'double taxation' of both the business and the individual and the rates for SMEs should be lowered in order to help them grow.

There is a growing need for international collaboration to ensure that the cross-border tax system doesn't impede the growth of small businesses across territories. The Government needs to find a way to ease the burden of European VAT on small businesses looking to expand and consider implementing a tax policy to aid exports. Tax policies should encourage SMEs to employ more people so that they can contribute to UK economic growth.

"The starting point should be that whatever a business spends on its business should be tax deductible"

John Whiting, tax director, Office of Tax Simplification

Priming the next generation

Key recommendations:

  • Balance creative, academic and business-oriented education
  • Commit more support to the entrepreneurial agenda in schools
  • Promote corporate projects which encourage entrepreneurship

One of the key trends identified by the forum as vitally important for the success of SMEs and the UK economy is encouraging the next generation to consider entrepreneurship as a viable career option. Head teachers need greater flexibility to shape the agenda of their schools, with more input from parents and students. Inspiration can be taken from revolutionary 'Gazelle Colleges' and 'Entrepreneur Academies', committed to facilitating entrepreneurship.

Fear of failure is a major deterrent to many young people today. The next generation of entrepreneurs needs to understand what defines success and what's required to create viable, sustainable businesses – and have strong role models to inspire them. Schools and universities can provide a safe environment to start a business, with access to mentors and funding.

Larger corporates should be encouraged to be more supportive of SMEs and champion the benefits of 'David and Goliath' working together.

"Practical entrepreneur-focused programmes teaching foundation business skills would be really beneficial to many young people"

Stuart Nicol, founder, Reboot Ventures

Drivers of growth

Key recommendations:

  • Increased investment in digital infrastructure
  • Role models in business and entrepreneurial ambition
  • Simpler access to funding

Investment in mobile and broadband networks yields economic and social benefits. It's essential that the UK extends the reach of secure and robust networks. If future application technologies are to become accessible to businesses of all sizes, personal data, financial information and personal privacy must be protected at all times.

LEPs – partnerships between regional authorities and businesses – localise decision-making and minimise the bureaucracy that often frustrates small business owners. Investing in and getting the best from these partnerships should be a priority.

Finally, the panel cautions against the stifling effect on the growth potential of early-stage businesses of an over-emphasis on exit planning. The adoption of a different mindset, akin to that which is more common in the US, would significantly enhance the potential to create larger and stronger UK businesses from start-ups over the long term.

In the US, when a company is worth $100m it is seen as a good start." Roger Parry CBE, chairman at MSQ Partners

To read this Newsletter in full, please click here.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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