INNOVATION JOURNEY NEEDS PLANNING – PART 1

INNOVATION REQUIRES BUDGETING

Budgeting is part of the “Predictive Accounting Process”, which is very important for all business operators, particularly businesses that are contemplating undertaking the “Innovation Journey”.

Why?

Business operators need to know where the funding for the business is going to come from and what the end result of research activities, going through the patenting process, focus groups, estimating costs, securing funding by the issue of shares will be.

This is the process that most people undertaking and completing the “Innovation Journey” have to go through.

It all starts with “Strategic Planning”. What is the concept? What is the idea? Have you checked that no one else has already registered this process somewhere in the world?

“Budgets” need to be thought through. You need to visualise the work that needs to be undertaken and who can undertake that work. If that person is an employee or a contractor, you will have to pay them.

What expenses are going to be incurred relating to rent, power, telephone, professional fees, supplies for the research and development activities?

The “Cash Flow Forecast” is where all this information is brought to account, to determine whether you are going to have enough money to fund the innovation process until you generate income from sales.

The Cash Flow Forecast will highlight the funding shortages. The business then needs to examine those shortages, to see whether alternative strategies can be implemented. If not, you will have to give consideration to either borrowing or attempting to raise capital direct from the public.

The “Innovation Journey” is not easy, but it can be very rewarding. Either way, it needs to be planned.

CASH FLOW FORECAST IDENTIFIES FUNDING SHORTFALLS

In the “Predictive Accounting Process”, Budgets are prepared for each operational activity and key drivers are prepared for the subaccounts relating to debtors, creditors, work in progress, research and development, capital expenditure. The financial implications of the budgets and the various key driver accounts are then reflected in the Cash Flow Forecast.

This is a component of businesses that has a clear concentration on the future. In a larger business, this activity is a joint effort by the CEO and the Chief Financial Officer (CFO). The CEO is the visionary, whilst the CFO’s role is to incorporate that vision into the Financial Forecasts.

SMEs should be no different. However, most SMEs will not have a full-time CFO. This is a service that some accounting firms and consultancies are able to provide to SMEs.

One of the key indicators that Cash Flow Forecasts reveal is whether the SME is going to run short of money – every CEOs nightmare!

Raising capital from the public is an option that is available to every small company in Australia.

Every company can utilise Section 708 of the Corporations Act to raise up to $ 2 million.

Young companies that were involved in Research and Development have been given a special advantage to raise capital, as there is an incentive available to investors in the Early Stage Innovation Company capital raising process.

Other companies with a turnover of less than $25 million annually are able to raise up to $5 million in a twelve month period from the public, by utilising Crowd Sourced Funding Equity Raising.

Arranging suitable funding is an important component of the “Innovation Journey”.

RAISING CAPITAL FROM THE PUBLIC

The Corporations Act prohibits companies or any other type of entity raising capital direct from the public, unless the company issues a prospectus except in a limited number of ways.

It is possible for a private company to utilise Section 708 of the Corporations Act to raise capital in what is known as “personal small scale offerings”. This relates to twenty issues or sales in twelve months.

The maximum amount of capital that can be raised in twelve months is $2 million and the offers are not to breach the twenty investors ceiling.

The offer must be a “personal offer” and can only be accepted by the person to whom it is made and is only made to a person who is likely to be interested in the offer, having regard to:

• previous contact with the person making the offer and that person; or
• some professional or other connection between the person making the offer and that person; or
• statements or actions by that person that indicate that they are interested in offers of that kind.

There is a prohibition on companies advertising or promoting a Section 708 share issue.

This section has been in the Corporations Act for about forty years and has served Australian SMEs very well.

There are restrictions on the amount of capital that can be raised utilising Section 708 as a private company is limited to only having fifty shareholders.

There is another way for a company to raise capital – Crowd Sourced Funding Equity Raising in which the fifty shareholder limit is effectively exceeded. We will discuss this method of raising capital next week.

Raising capital is an integral part of the “innovation journey” as most companies require capital to fund their business vision.

Towers Business Development can assist you to be in a position to be able to raise capital for your business.