“To avoid being out-manoeuvred by agile competitors, technology businesses need more than just a great idea and the finance to develop it. They need to know how to get the most value from every pound they spend, for the benefit of the business and all its stakeholders. They need to be structured for success.”Stephen Hemmings – Technology Sector Advisor
Although technology businesses are innovative by nature, fending off fierce global competition can be a risky and costly process. Without the finance required to develop their product or service, and get it market ready, they could end up being little more than a flash in the pan.
Securing the finance needed to invest in product development can be a huge challenge, but it is not the only one. It is also important to make sure the business is structured correctly to take full advantage of any cash being invested and to de-risk its activities as far as possible. Getting the basics right in terms of cash flow management and accurate forecasting is essential.
Cash Management Matters – But why?
In a fast-growing sector, it is especially important that business managers understand the principles of good cash management and know how to build a business that is structured to deliver rewards for key employees and investors over time. The UK’s digital tech sector is accelerating faster than the rest of the economy, according to Tech Nation 2018, the state of the nation report on the sector. Turnover of digital tech companies grew by 4.5% between 2016-17 compared to UK GDP which grew by 1.7% over the same period, according to the report. At the same time the number of jobs in digital tech rose at five times the rate of the rest of the economy. It’s not all good news however. About 50% of UK start-ups fail within their first year and the thriving technology sector is littered with examples of businesses that have failed to realise their potential due to financing and/or production difficulties, or a lack of market demand. Whilst many of these failures are unavoidable, a proportion are caused by something quite fundamental – poor cash-flow management. Research carried out in 2017 by Menzies LLP among 111 tech business owners revealed that the biggest risk factor is getting into cash-flow difficulties.
In order to manage cash effectively, the business needs access to accurate, real-time information. Due to the proliferation of cloud-based software for financial management applications and the potential to produce integrated data sets, business managers should review the marketplace regularly. To ensure they get maximum value from their investment, they should start by identifying the KPIs of the business and select the right products to ensure this data is readily available. With access to real-time data, business managers will also be able to forecast with greater confidence, minimising the risk of cash flow challenges arising.
“To attract early-stage investment, tech businesses may be able to utilise the Enterprise Investment Scheme (EIS), or the even more attractive Seed Enterprise Investment Scheme (SEIS) but strict rules apply.”Sam Goodsell – Technology Sector Advisor
Accurate forecasting is especially important for fast-growing tech businesses as it allows investors greater visibility of the returns they might expect to receive over time. This can be useful from a management perspective too, as the business will be able to gauge when further funding might be required to sustain its growth strategy. Too little funding and the project could stall, or worse still, the business could fail. Too much funding and ownership of the business could be diluted more than is required, reducing returns for investors. With the right cash flow management and forecasting in place, technology businesses will be in a much better position to demonstrate to investors when and how returns will be crystallised. This will reassure them that the business is structured to deliver value over time.