This newsletter, formerly known as Forward Thinking, has been relaunched by our Entrepreneurial Services group to focus on issues relevant to entrepreneurs, growth companies and their advisers.

Smith & Williamson's Entrepreneurial Services group offers energy and expertise to help client businesses grow. We work alongside emerging and established entrepreneurs and management teams to help start, develop and grow their businesses and, where appropriate, achieve a successful exit.

Our new Enterprise newsletter is designed to help the busy entrepreneur. There's a feature on business angels, as well as our round-up of news and views for the growing business. Meanwhile, the first in our entrepreneurs' toolkit series focuses on managing cash.


In the first half of 2007, we were on the up, up, up – collectively oblivious to the unsustainable proliferation of credit and the impending economic realities.

We were on a roll, ignoring those small voices of caution and believing that the economic miracle of the emerging economies would somehow alter the world order, guaranteeing increased profits and rising living standards for years to come. Back then it was even fun reading the newspapers.

Fast forward one year. We now know that the banks and financial markets got carried away, resulting in some startling fatalities. The bubble that was housing is still bursting, blowing away consumer confidence. Commodity price increases, caused by excess demand and a focus on alternative energy, have created unacceptable levels of inflation, leaving central banks in a quandary and interest rate policies on a seesaw of uncertainty.

For many, the end of the NICE (non inflationary, consistent expansion) period will be their first experience of a real economic downturn. So what's in store?

The answer is that, in the main, it will be business as usual. Yes, some sectors are particularly vulnerable. Yes, many businesses are bound to face difficulties increasing, or sometimes even renewing, finance facilities in a more hostile environment. Yes, there will be an increase in business failures.

Unfortunately, these things happen from time to time, often fuelled by excesses and the momentum of the herd mentality.

On the other hand, entrepreneurialism will flourish and businesses with sound strategies and good management will reap the benefits. They will seize opportunities, build their brands, increase their market share and make life-changing but affordable acquisitions. As Warren Buffett famously said: "Be fearful when others are greedy. Be greedy when others are fearful."

Ho hum. It'll all be the same in 100 years.


Entrepreneurs needing funding for their businesses may want to think again about business angels.

As summer gives way to autumn, the certainty of the changing seasons is accompanied by an uncertain and challenging economic outlook. When spring comes, will it bring with it the green shoots of recovery or will we still be suffering the almost daily shocks that are rattling our financial markets and undermining business confidence?

Preparing for the upturn

Although we don't know when it will happen, we can be sure that recovery will come eventually. So the priority for the UK's entrepreneurial and growth businesses is to survive the slowdown and, where possible, prepare for the upturn ahead. To achieve this, businesses will need access to sufficient cash to keep going and developing. For many, it will mean actively managing working capital and maintaining suitable facilities with their banks.

Given a level playing field, most businesses should be able to cut their cloth. Unfortunately, however, the signs still of credit, irrespective of its cost. This, of course, is a generalisation, but if the survivial of your business is going to rely on maintaining or increasing your bank facilities, you shouldn't leave anything to chance.

Filling the equity gap

Much has been said about the equity gap. Some believe there is no gap, just a lack of investment-ready companies for equity providers to invest in. There's some truth in this, but not much. The fact is, however well run or exciting a business, most equity providers won't entertain small investments of a few tens of thousands or even a few hundreds of thousands of pounds.

With the exception of a limited number of Venture Capital Trusts (VCTs), there's simply too much cost and uncertainty for institutional investors in smaller deals. The market is therefore effectively closed to smaller companies, leaving them to negotiate with their bankers or with assetbased lenders, or to raise money from family, friends or business angels.

The rise of the angels

Over recent years the business angel market has become something of an industry. Potential investors, typically high-net-worth individuals, can join angel networks or more formal investor networks, gaining access to opportunities on an individual or collective basis.

Angel networks such as London Business Angels or Keiretsu Forum, the international network whose new London office has recently been set up by Lord Beaverbrook, hold regular investor presentations to expose early stage opportunities. Investor networks such as Hotbed take a different approach, finding suitable development capital opportunities, agreeing a clear exit plan with management, structuring and executing the deal and offering participation to members, normally in investment units of £25,000. This provides investors with a flow of opportunities and an interesting portfolio approach.

What are the angels looking for?

Investing in smaller businesses is not for the faint-hearted and, unless pre-vetted by an investor network that has done its homework, seasoned investors will quickly discard most opportunities.

A poor business plan, low barriers to entry, unrealistic financial forecasts and (often) ridiculous valuation expectations are just a few of the factors that will quickly put an end to potential investment for these cashhungry businesses.

While the majority of businesses are simply not suited to external investment, there are still plenty that are. For those that are well organised, with a sensible plan and some idea of when and how investors are likely get their money back, the angel and investment networks represent an underexploited opportunity.

There are three key reasons for this.

  1. Members of angel and investor networks are, in the main, serious individuals who want to find sensible investment opportunities. They pay fees to belong to their networks and do not want to waste their time.
  2. There are often significant tax benefits for investors. If the business qualifies under the Enterprise Investment Scheme (EIS) regime, investors may be able to claim income tax relief and obtain relief from capital gains tax (CGT) on a future sale of their shares. There may also be potential inheritance tax advantages.
  3. Many angels may be happy to work part time on the business, giving valuable advice, providing knowledge, experience and connections, and helping the management team to fast track their growth.

Those who need and deserve funding should go and look. It's there for the taking.

Useful contacts

British Business Angels Association:


Keiretsu Forum:

London Business Angels:


Aim – signs of life?

It has been a very quiet year so far on Aim, but there are slighty more encouraging signs if you look carefully.

The number of new companies that joined Aim fell from 146 in the latter half of 2007 to just 69 in the first half of 2008. There was a large drop in funds raised for new admissions – from more than £3bn in the second half of 2007 to under £1bn in the first half of 2008.

However, funds raised by existing companies on Aim in secondary fundraisings have fared better (only down from £3.3bn to £2.3bn over the same period) and companies in minerals and natural resources are making the most of record commodity prices – of the £2.3bn raised in secondary fundraisings to June 2008, over £1bn went to companies in the sector.

Business intelligence maps

Google has joined forces with Information Builders to release WebFOCUS, the first so-called business intelligence 'mash-up'. The mix and match software gives users a visual representation of sales figures and stock movements in different locations via an interactive Google Map. Businesses can compare key data for numerous outlets using maps enriched with analytic content. The intention is to make it easier to identify regional trends, as well as give users the ability to zoom in and out of critical locations.

UK online ad spend overtakes mainstream TV

Spending on online advertising overtook mainstream TV in Britain last year for the first time, according to Ofcom. In its annual report, the watchdog found that online spending in 2007 grew to £2.8bn. The combined net advertising revenues of ITV1, Channel 4, S4C and Five were £2.4bn. Internet advertising equalled that of outdoor and magazine advertising combined.

Online spending was dominated by paidfor search (£1.6bn), where sponsored links appear as internet search results. The rest was split equally between display and classified ads.

The success of the internet remains a particularly UK-focused phenomenon. Last year, online spending accounted for 19% of all advertising – a much higher proportion than in the US, France or Germany.

Lords urges scrapping of VAT on electrical goods repairs

VAT should be lifted from the cost of repairing televisions, vacuum cleaners and fridges to discourage people from throwing them away when they are broken, argues the House of Lords Science Committee.

The committee believes that with appliances getting cheaper and labour more expensive, most people are not prepared to pay high repair costs. Buying new or repairing can cost the same, so more and more electrical goods are being dumped into landfill and replaced by the latest design on the market.

The peers' report says that waste could be reduced if consumers were encouraged to keep products for longer and repair them when necessary.

The committee also calls on the Government to introduce variable VAT rates, reducing VAT on projects which use sustainable raw materials.

Free web accelerator for small Businesses

A free web accelerator is being offered to start-ups, entrepreneurs and emerging new media businesses.

The free web accelerator, available from Velocix, makes videos stream faster, music play uninterrupted and games run smoothly.

The free service has an allowance of 500GB – the equivalent of more than 8,500 songs, or 10,000 to 12,000 music videos – more than enough for a young company starting out. Velocix offers the free accelerator to young companies in the hope that their clients will stay with them for the long term. As a business expands and its needs grow, other larger, paid-for packages are available from the firm.

Save on recruitment costs by promoting internally

The average recruitment cost of filling a vacancy per employee has risen to £4,667. This increases to £5,800 when organisations also calculate the other costs of staff turnover such as vacancy cover, redundancy, recruitment and training. This is according to the latest figures from the Chartered Institute of Personnel and Development.

Right to work overtime secured

British workers will continue to have the right to work more than 48 hours per week, after ministers made a landmark agreement with the European Union Employment Council.

The Government said the agreement will allow the UK's "vital labour market flexibility" to continue while, at the same time, ensuring that workers are treated fairly.


A twist on entrepreneurs' relief

It's not unusual for a partner or a director to own property used in a business. Under the old CGT rules, whether or not rent was paid was not material in ascertaining the tax payable on selling the property.

In April, taper relief was withdrawn and replaced by entrepreneurs' relief, which is much more restrictive. Its availability could be adversely affected if rent is paid on the property, so individuals in this situation should review the position as soon as possible.

Changes to EIS and VCT tax Incentives

The Finance Act 2008 introduced some changes to the VCT and EIS rules. They apply to EISs for shares issued and to VCTs for raised funds, on or after 6 April 2008.

The annual limit for an individual investing in EIS qualifying shares has been raised by £100,000 to £500,000 for the 2008/09 tax year (the £500 minimum investment remains). While claims at this level are currently being accepted, there is the proviso that the increased limit is awaiting EU state aid approval.

Shipbuilding, steel production and coal production have been excluded from trades qualifying for EIS status companies and companies in which VCT's may invest. VCTs and EISs have specific requirements around the level of investment, the type of investee company and the individual who can obtain tax relief.

A new property development tax?

Property development companies may be hit by a further tax from spring 2009.

The Government has confirmed that local authorities will be empowered, although not required, to implement the new Community Infrastructure Levy (CIL). The new tax will be used to fund local infrastructure developments.

The rate of CIL will be set by local planning authorities, based on their assessment of infrastructure costs required to support their plans. CIL collections will be used to fund infrastructure development.

The calculation of the levy will progress as planning negotiations proceed, but it will become payable at the point of development. There may be a 28-day payment window, with some flexibility where development is staged.

Unexpected liabilities of MBOs

An unanticipated tax charge may apply to management buy outs where an indirect loan is made to shareholders. It's not unusual for a target company to lend to a new company (formed to acquire the target), with the consideration then paid by this new company to the shareholders of the target.

It is understood that HM Revenue & Customs (HMRC) is targeting this area and it could potentially result in a company tax charge at 25% of the value of this type of loan. There are strategies to ensure this type of tax charge does not arise. Therefore, thought should be given to whether a liability exists and to the ways in which it could be mitigated.

Tax breaks for working from home

HMRC has published new guidance on the types of expenses the self-employed working from home can claim without the property becoming liable to CGT on sale.

If an area of the home is properly set up for use as an office, then tax relief can be claimed on the costs incurred.

As long as certain criteria are met, HMRC has said the self-employed can claim for household costs such as council tax, mortgage interest, buildings and contents insurance, gas and electricity.

Medium-sized groups to lose consolidated accounts exemption

A significant number of companies will need to prepare consolidated accounts – possibly for the first time – under changes introduced by the Companies Act 2006.

In the past, both small and mediumsized companies have generally not been required to prepare group accounts, i.e. consolidate the accounts of the parent company with those of its subsidiaries. For medium-sized companies the exemption could previously be obtained if two out of the following three limits were not breached: turnover of £22.8m, total assets of £11.4m and 250 employees. The Companies Act 2006 has now removed the exemption for medium-sized groups. Therefore, only small groups will not have to prepare consolidated accounts. While the financial limits for small groups have also increased, they are substantially less than those for medium-sized groups – turnover under £6.5m, total assets under £3.26m and 50 employees.

As no exemption has been given from the requirement for accounts to contain comparative information, this will not be just one year of consolidation, but two.

Affected companies should bear in mind that the removal of the group accounts exemption coincides with the more general reduction in filing limits for all private companies from ten months to nine months.

What's happening with IFRS and UK GAAP?

UK unlisted companies currently have a choice in preparing their financial statements. They can either switch to International Financial Reporting Standards (IFRS) or continue to apply UK Generally Accepted Accounting Principles (UK GAAP). If your company already uses IFRS or is planning to do so, your finance director will be aware that new and revised IFRS standards and interpretations are still being rolled out. For further information, see the forthcoming edition of our Financial Reporting newsletter. Visit

But many companies have chosen to stay with UK GAAP. On Tuesday 18 November, members of our National Assurance Technical Group are holding a seminar to guide those companies on a range of topical issues. The seminar will be relevant to finance staff involved in preparing financial statements of unlisted companies and those wishing to refresh their knowledge of accounting developments.


With financial markets in turmoil, the M&A market may appear to be in dire straits. From Lehmans to Merrills, the Masters of the Universe are no longer flying so high, but what does this mean for mere mortals?

Private equity houses continue to create significant activity. While they may steer clear of certain sectors, resilient companies with strong cash flow or long-term contracts remain attractive. With private equity no longer outbidding trade, corporates have once again become the primary acquirer and we expect to see more strategic purchases. 2008 has seen an international trend in mid-market transactions, reflecting a weak pound and the flow of money into the UK from the developing world and Middle East. The result is more acquisition activity.

The recent slump in debt financing has seen vendors' price expectations become more realistic as it becomes clear there is no quick fix for current market uncertainty. This provides the opportunity for buyers to re-enter the market at more attractive prices. In addition, the certainties of death, divorce and retirement (succession planning) will ensure a flow of privately held businesses for sale over the medium term.

We believe these factors will contribute to a marginal improvement in mid-market M&A activity over the next 9 to 12 months as the market adjusts, but acquirers will remain highly selective. However, quality businesses in resilient sectors will continue to be of interest to trade, private equity and international buyers.


Businesses don't fail because of a short-term lack of profitability; they fail because they run out of cash.

In the current economic climate, it's essential to keep on top of your cash flow. You can't rely on credit being readily available when you approach a spell of trouble. So how do businesses make sure they keep the right balance?

The solutions

Cash flow management

As cash flow is the key factor determining business survival, it's crucial to manage the basics.

  • Make sure your cash flow plans are realistic and not overly optimistic.
  • Keep a handle on your cash flow and how it's forecast to fluctuate at all times.
  • Allow headroom in your cash requirements to counter unexpected eventualities.

Business planning

There are many factors to take into account if your business is to maintain a good cash balance.

  • Closely manage your stock and debtors to reduce your working capital requirements to a minimum.
  • Be wary of overtrading. Higher sales than forecast may seem like success, but they can increase working capital requirements and cause cash shortages.
  • Underperformance, for example, through lower sales, lower margins or higher costs, will adversely affect cash flow. Consider reducing overheads to stop the cash drain, but try not to cut the wrong areas.
  • Consider approaching HMRC to agree an instalment basis for past liabilities.
  • In the current economic climate, think very carefully before committing to a business plan that will require further funding down the line, unless those funds are already contracted.

Managing credit

Where credit is needed, there are some basic rules to consider.

  • Get the right balance between equity, long and short-term debt and asset-based finance. Don't borrow short to invest long.
  • Consider credit insurance to remove the threat of bad debts.
  • Manage your supply chain to gain maximum credit and margin.
  • Talk to your creditors early if you need to extend their terms.
  • Examine the opportunity for other forms of finance, e.g. grants or tax credits.
  • Don't ever commit to buying goods and services when you know you will be unable to pay. There are laws against this!
  • If you are confident of success, seek new equity, bank or asset-based borrowing. If institutions won't play ball, try business angels, but don't feed the dragon.

Get help

If you're in trouble and not sure what to do next, don't delay; seek professional help before it's too late.

  • If the business is failing, don't sit back and wait for things to improve on their own.
  • Don't operate in a mirage of optimism. Depending on the cause of the difficulty, professional advisers may be able to help.

Visit our new Entrepreneurs' website for more toolkits and essential information for the entrepreneur.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.