October 2023 Issue

THE INNOVATION JOURNEY REQUIRES PLANNING

Starting The Innovation Journey

Many SMEs set out with a vision to develop a product, process, service or some other business activity.   Unfortunately, some people don’t take into consideration the entire process in their initial thinking.  An appropriate terminology for the process is “the innovation journey”.

The innovation journey does require planning and an understanding of the time that it will take, the documentation required much of which will need to be provided by an external expert.

This means that costs will be a significant issue for most innovators.

Research and Development

The innovation journey normally starts with research and development.  To claim the Research and Development Tax Offset the applicant must be a company and maintain the records of research and development activities as required by the rules specified by the Australian Taxation Office.

If the company is spending more than $20,000 in the financial year on legitimate research and development activities and all of the records pertaining to that research and development expenditure have been maintained the company should be able to claim 43.5% of that research and development expenditure as the Research and Development Tax Offset.

If the company is trading at a loss the company is able to make an election in its income tax return that the cash equivalent of the Research and Development Tax Offset is paid by the Australian Tax Office to the company’s nominated bank account subject to the company’s tax losses exceeding the calculated Research and Development Tax Offset amount.

Starting the Journey

To start the “innovation journey” please contact us for advice on the record keeping requirements that the company will need to maintain to be able to successfully claim the Research and Development Tax Offset.

Government Grants

Government grants are a great way to receive assistance without too many strings attached i.e. rarely does a government grant impose any sort of ownership being transferred to a government agency.

There are a number of grants that might be suitable for a business undertaking the innovation journey.

A popular grant that assisted many companies that were on the “innovation journey” was the “Accelerating Commercialisation Grant” which operated for about twelve years until it was phased out in the 2023/24 Australian Government Budget.

In the budget speech the Federal Treasurer indicated that the Government was proposing to introduce a similar grant to the Accelerating Commercialisation Grant later in 2023.

Some information has been released on the Internet which indicates:

• The “Industry Growth Program” will support early-stage businesses in their most challenging development phase.

• Projects in the priority areas of the “National Reconstruction Fund” will be eligible for the “Industry Growth Program”:
  • Renewable and Low Emission Technologies
  • Medical Science
  • Transport
  • Value Add In Agriculture, Forestry, Fisheries Sectors
  • Value Add In Resources
  • Defence Capabilities
  • Enabling Capabilities

• The Government’s website indicates that the new programs will offer grants of $50,000 – $5 million to help businesses scale up.

Business Plans

Business Plans – are important, in fact a Business Plan is just as important for a business person as a map is for a tourist – if you don’t know where you are going how are you going to know when you get there and more importantly how do you know when you are off track on your overall strategy?

To participate in the “innovation journey” a business needs a guidance book and this is its own Business Plan.

A Business Plan should be developed exclusively for your business and not be taken out of a textbook or someone else’s modified plan.

Your Business Plan needs to be unique.  It needs to analyse your business so that like a tourist you plan your business journey and you determine what you wish to achieve at various stages so that you are able to compare where you are at and what you have achieved against the original plan.

Key Components

The key components of a Business Plan for a company on the “innovation journey” are:

• Your expectation of the innovation journey – what are you planning to achieve over what time?
• Research and development projects that need to be undertaken. To be able to claim the Research and Development Tax Offset you need to be able to identify the core activity and the supporting activities.

To be able to claim the taxation benefits you must have a “core activity”.  A core activity is something:

• whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience but can only be determined by applying a “systematic progression of work” that:
  • is based on principles of established science; and
  • proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions; and
• that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new improve materials, products, devices, processes or service).
• Records are needed of who did this work – when – how much did it cost – have you got the records to support it?
• Patents

Details of any patents granted, provisional patents held or patent applications currently been assessed.

• TOWS review

T – trends affecting your firm

O – opportunities that are available

W – weaknesses to be fixed

S – strengths to be built on

• Products/services – do you have any other products or services within your company?
• Market – what is your expectations of the market for your product?

Competitors

• Who are they?
• What are their strengths, weaknesses?
• What opportunities are available to you?
• Customers
• Who are your current customers?
• Who do you expect to be the customers for this new product?
• Suppliers
• Who will supply the raw materials that you will require?
• Have you discussed availability of products and what these supplies will cost?

• Marketing Plan
• Social Media Plan
• News releases
• Website development – Information available?
• Human resources
• Attraction
• On-boarding
• Meetings
• Training
• Retention
• Vision for the business
• What will be achieved in the next three years?
• Are you interested in this Journey?

The innovation journey can be challenging, exciting and very rewarding for some people.

Unfortunately, some people do not get advice early enough in the process so that some of their activities might not qualify for the Research and Development Tax Offset and that can cause problems for some of the other activities relating to bringing the innovation project to a successful conclusion.

This article will be continued in the November edition of Business Plus.

If you would like to have a discussion about the commencing an Innovation Journey, please give us a call on 1800 232 088 or send an email to or visit our website www.towersbusiness.com.au.

WHAT DOES IT MEAN?

Crowd Sourced Funding Equity Raising means:

• A type of corporate capital raising whereby a company seeks funds, in small amounts from a large number of individual investors in return for securities in the company.

• The company can be a Proprietary Limited Company or an Unlisted Public Company.

Maximum amount of capital to be raised by a Crowd Sourced Funding Company means:

• $5 million in twelve months from all capital raising opportunities

Maximum investment by a “retail investor” in a Crowd Sourced Funding Company means:

• $10,000 per company in a 12 month period.

Retail Investor is described as:

The person acquiring the securities or crowdfunding service “DOES NOT GIVE” the Crowd Sourced Funding Intermediary a certificate prepared by a qualified accountant within the preceding two years that states the person has net assets of $2.5 million, or gross income in the last two financial years of at least $250,000.

ASSISTANCE TO HELP SURVIVAL

There are a number of ongoing business activities that can be implemented to assist businesses to perform better, such as:

• Weekly Performance Report – analysing trends, Key Performance Indicators and the profit or loss generated from each activity’s performance during the week.
• Monthly Financial Accounts – prepared for each individual business unit that the business operates are a very important component of the critical information that business owners/managers need to assist in difficult times. The Monthly Financial Accounts should include Key Performance Indicators and a comparison to the Budget.  This will complete the picture of what has happened within an individual business unit for the month.  The prompt access of this type of financial report gives the senior management of the business access to real information that can assist in the day-to-day management of the business.
• Monthly Business Review Meeting – is the opportunity for the Leadership Team to meet with their Accountants, over a detailed review of actual performance including discussions on items that are at variance to the assumptions that were made in the Budgets. This will enable a review to be made on variances to see whether remedial action has to be taken to prevent similar variations occurring in the future.
• 12 monthly evaluations of financial performance are very important to ensure the financial viability of a business. It is not sound management to be relying on an annual set of Financial Accounts and Income Tax Return to monitor financial performance of a business.
• Debtors’ system review, with main focus on the debtors’ days outstanding.
• Working capital analysis each month – monitoring investment in debtors, stock, work in progress.
• Research and Development projects structured in a way to comply with the Australian Taxation Office requirements for the claiming of the Research and Development Rebate.

CHARGE OUT RATES CRUCIAL FOR PROFITABILITY

CHARGE OUT RATES CRUCIAL FOR PROFITABILITY

Using a “Charge out Rate Calculator” is important for tradie and manufacturing businesses, to get the individual charge out rates for each team member at an amount, which will enable the business to achieve its targeted profitability.

There are a number of components in ensuring that the business will trade at the targeted profit including:

• Labour on costs – covering annual leave, shift worker allowance, training, apprenticeship training, holiday pay loading, statutory holidays, payroll tax.
• Labour cost – salary – working hours – budgeted productivity percentage.
• Budgeted overhead expenses
• Estimate of materials to be purchased for clients and the mark-up percentage on those purchases.
• Targeted profit
• Proof sheet on the team’s projected performance and the profit to be generated.
• Is this profitability target what you want to achieve?

Once you have established the charge out rate, it is important to monitor the actual hours being charged clients on a weekly/monthly basis.

Each month, the Profit and Loss Account should be produced together with a summary of Key Performance Indicators, so that a decision can be made as to whether to vary charge out rates for some or all of the team members because of non-achievement of the budgeted profit target for the month.

PREDICTIVE ACCOUNTING – AN IMPORTANT TOOL

The preparation of “Predictive Accounting Reports“ will assist in the implementation of the strategies that you have included in your Business Plan, or strategic review.

The “Predictive Accounting Process” assists business people to plan your future.  We believe this is the most important work that an accountant can perform for a business.

The Predictive Accounting Process incorporates four (4) key components:

1. Key Drivers Within Your Business – this is the “engine of the budgeting process” where the detailed working figures are contained.
2. Budgets – preferably should be prepared for each operating activity conducted by the business. This way, the individual manager can receive his/her own Budget.  This will assist the manager to gain a better understanding of how the operation that he/she is responsible for performs.
3. Cash Flow Forecasts – information will be transferred from Budgets, some of the key driver items and Balance Sheet Accounts to the Cash Flow Forecasts. Problems in maintaining an adequate amount of cash in the bank will be identified well in advance, which could lead to the business borrowing additional funds or the business could seek to raise capital direct from the public.
4. Projected Balance Sheet – this is what the overall financial picture will be in future years, if the strategies contained within the Business Plan or strategic review as reflected within the Budgets and Cash Flow Forecasts are implemented.

The CEO/Owner then has the opportunity to analyse the projected financial picture of the business and decide whether that end result is acceptable.  If the CEO/owner would prefer a different result, financial projections can then be prepared to identify the changes that will have to be made, to achieve a different financial position.

If you would like to understand more about the Predictive Accounting and how it might apply to your business, please telephone Peter Towers on 1800 232 088 to arrange a complimentary zoom meeting, or send us an email: .