Lisa Minelli told that money makes the world go round, but she didn’t say how. .
People go into business to make money. One method to help them do so is the accelerator (or incubator).
What is an accelerator?
An accelerator is a facility in which financial and business experts provide advice, administrative support and sometimes capital to start-ups and adolescent companies to help them do business. Sometimes, engineers and scientists need to be taught this.
Some accelerators are reserved for high tech, and last only a few months. After that, businesses are back on their own.
Some accelerators provide seed capital, usually in limited amounts. They may also raise capital from third party investors – angels, venture capital funds, financial institutions and so forth.
Many accelerators want the candidate firms to work on their premises, to make sure they do work. Other accelerators, usually provided by accountants, can see from the books they keep whether the firms are working.
What use is an accelerator?
The accelerator will typically help the firm set its goals and devise a strategy and a business plan with a timetable to achieve them. In reality, things won’t go to plan, but nothing ventured, nothing gained. You won’t go places if you don’t get going.
An exit strategy may also be formulated – positioning for a future trade sale or an IPO, for example
On the financial side, accelerator experts may review the revenues, profitability, cash flow, research budget, general budget and fixed asset needs of the firm.
This is relatively easy in Israel because the monthly bookkeeping and tax reporting requirements mean that most of this information is available on tap, and the rest can be conjured up with a few hours work each month. Follow up and monitoring may be monthly or bimonthly or quarterly, as reasonable in each case and for each item.
Sometimes the firm’s accountant wears an extra hat to make all this happen – as an “outsourced CFO”. A regular accountant looks back at past results, a CFO (chief financial officer) looks forward.
The accelerator should review the marketing strategy of the firm and its USP (unique selling points). A USP is factor that differentiates a product from its competitors – for example, intellectual property (IP), lowest cost, highest quality, first-ever, major problem solved, etc.
In hitech, IP usually means special knowhow, sometimes patented. In low tech, intellectual property usually means a good brand name or trade mark.
Marketing professionals should be consulted regarding marketing strategy and techniques, from the traditional to telemarketing to social media.
The accelerator won’t forget to review legal issues in conjunction with legal experts in each country. These may include registration of intellectual property, environmental issues, contracts with suppliers, distributor and customers, licenses employment matters, and many more.
On the tax side, many issues may need reviewing in each country concerned – claiming incentives, utilizing start-up losses, avoiding double tax internationally (and sometimes all tax), reviewing exposure to VAT, withholding tax, transfer pricing issues, personnel taxation, employee statutory pension cover, study funds (hishtalmut), overseas travel reports and employee stock options.
The firm must keep its monthly and annual tax reporting up to date. In cases of late reporting, the Israeli Tax Authority is quick to impose penalties, demand 30% withholding tax, deny permission to deal with public bodies/public companies and even freeze bank accounts.
The investors should review their anticipated capital gains tax situation if an exit were to occur. The major shareholders (over 10%) should check their personal tax returns are up to date, and that they have adequate pension cover.
On the operational side, many aspects should be reviewed, depending on the nature of the business. Maintaining and improving the quality of your offering is a prerequisite.
Morale in the workplace(s) is of course vital. Much has been written about this. A key ingredient is having a leader who presents a vision that employees identify with.
That vision should be developed into goals that develop into strategy that develops into a business plan, as discussed above.
Also, depending on the business, consider the level of inventory, the revenue model, the supply chain, whether to operate from a home office or formal premises.
Risk management should also be considered – assessment, prevention, monitoring, professional assistance, protective contract clauses, insurance. Risks include product, legal, tax, health and safety and many more.
Scaling up when growing should be treated as a separate item on the agenda, in our view. It is more than employing more people and dealing with all the above.
Scaling up means installing a hierarchy; defining individual responsibility, reporting and communication verbally and in writing; and implementing a common mission statement, best procedures, performance incentives.
Steady leadership and stability are called for. Team meetings and team building events are also important.
And what about the next generation of products or services?
Going international carries additional challenges – cultural, language, local and legal requirements, trading relationships. This may seem far off, but tech start-ups are often based in Israel and elsewhere (e.g the US) almost from day one.
Do you use dealers, subcontractors or a subsidiary company? Is a market survey needed? How will products or services be supplied? If over the internet, what are the technical and logistical requirements? Are sufficient revenues and profits expected? Will they grow? Will there be market penetration costs and losses and will they be temporary?
The above is just for starters. The main lesson that was learned from the dot com crisis is to focus on revenues, profits and team morale.
A short term accelerator that lasts a few months may point you in the right direction.
Longer term guidance from accountants or other qualified business consultants, may be helpful in today’s competitive climate, especially in the start-up nation.
Wishing all our readers a Happy Independence Day!!
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant at Harris Consulting & Tax Ltd