KTP Proposals - Making the case for affordability

Fiona Nightingale – Senior AdviserJose Freedman - Adviser

Workshop Aims:

• To understand the financial information needed to support an application for a Classic KTP

• To look at good practice in the assessment of accounts

• To understand Adviser / Manager roles

• To understand what the Adviser needs at EOI stage – and why

• To understand why the Adviser may ask for additional information to support the application and make a case for affordability

Desired Outcomes from Workshop:

• To equip you with an understanding of what makes a good case for affordability and make you aware of issues that give PAG concerns about accounts

• To avoid raising expectations of companies and academics, and everyone’s time and effort, in drafting EOI’s and having meetings - if accounts are unsupportable

• To equip you to recognise the ‘no hopers’ and politely re-direct then to other, non KTP, programmes!

• To avoid financial snarl-ups at PAG!

We Have Joint Aims:

• We are on the same side!!

• We all want successful proposals, produced as efficiently as possible

• We all want to see our partnerships succeed

Specifically, what PAG needs to see is :

A company partner that has sufficient financial and managerial resources to be able to support the KTP and commercialise the results

- To protect & maximise use of public money- To protect the Associate and the KB Partner- To protect the reputation of the KTP Scheme

The Company must give us confidence in its continuing viability

The Way We Were:

We used to say ‘NO’•KTP rules used to insist on:

- 2 years’ audited accounts before we would allow an application- Profitability and positive liquidity.

•Start up companies and micro companies were very exceptional

•Large companies tended to be UK owned – not multinational

The Way We Do it Now:Now we say ‘Make a Case’

•Many interesting companies have ‘challenging’ accounts

•Companies are taking more risks with finances in response to competitive pressures

•Company funding comes from a wider range of sources

•Globalisation has changed company ownership structures

It all makes life a lot more complicated !

What is Ideal?

Well managed, stable businesses – normally with more than 2 years’ trading- Can be less in certain circumstances!

Profitable, growing, positive liquidity, positive net worth, - Can afford its share of programme costs - Can also fund cost to commercialise outcomes

Normally more than 6 employees_ But it is possible with less !

x KTP IS NOT A TOOL FOR RESCUING FAILING BUSINESSES!

Exercise – in Groups of 5:Discuss:

1.What checks do you do before you visit a company?

2.At the first meeting, what questions do you ask?

3.What information do you ask the company to provide?

4.Why do you do what you do?

You have 10 minutes!

Some of the Answers:Before you visit:

• Credit checks (history, but useful)• Web site – gives details of business, key people, products etc. and

may give details of parent group, subsidiaries or such like

Questions you might ask:• Are they a UK registered company• Are they part of a group / do they have a parent / subsidiaries• Are they an SME• Who owns the company• Is there an organisation chart• Is there a business plan

What You Should Try to Get Hold Of:

Audited Accounts / Financial Statements for last TWO years

Also: Latest Management Accounts if above are more than 9 months old as at actual date of PAG where full proposal will be reviewed

Same for parent companies if partner company owned by parent / group

All above to be included in the EOI and the main Proposal Form

What if they haven’t traded for 2 years or haven’t got 2 years’ audited accounts?

• Talk to your Adviser and agree THE MINIMUM information that will be needed prior to the EOI visit.

• Ask for the latest accounts / financial statements they do have – from the company and, if appropriate, the parent group

• Ask for the latest management accounts that are available

• Ask for the business plan and evidence of performance against that plan

What YOU should do next:

Check: The applicant must be a UK registered organisation- Even if has a non UK parent / group ownership

Determine whether the applicant company is part of a Group: [This is contained in the notes to the accounts ]

-If it is, you will need to look at the Group accounts as well as the applicant company’s

Determine whether the applicant company qualifies for SME or Large Company grant rate:

-EU Definition – available on internet; based on employee numbers, annual turnover and balance sheet total. NB measure size of Group if a group

Identify the ‘potentially unsuitables’ to better serve the applicant and avoid wasting everyone’s time:Discuss with your Adviser BEFORE MAKING ANY COMMITMENT if you see:

• Negative liquidity or negative net worth and no sign of a parent / VC backer

• Considerable year on year losses with little liquidity and / or net worth to underwrite the losses – and / or no cash

• Company has been trading for less than a year

• Company seems to have an insufficient number of employees into which the KT can be embedded

Before the EOI Meeting with the Adviser, Company and Academics:• As well as the draft EOI, make sure you give the Adviser well in advance

of the meeting:

- The ACTUAL Accounts / Financial Statements for the last 2 years - Plus the management accounts if more than 9 months old by PAG - Plus the same for the Group if appropriate

• Advisers MUST see the full sets of accounts; reading them from the EOI is not sufficient.

• Give the Adviser time to review accounts so that the Adviser can pre-warn them of finance questions or further information requirements before the EOI meeting. We don’t want to embarrass the company in front of the academics!

What if some of the figures don’t look too good? • The Adviser will be able to make a judgement on affordability by considering

other financial and performance related information and so may ask for additional information such as:

Break down of timing and reasons for losses The business plan and evidence of performance against it Cash Flow forecasts for next two years Details of order book status Burn rate / investment schedules Bank overdraft headroom and / or other loan terms Letters of commitment by Directors and / or backers

• It is down to the Adviser to decide if they should visit the company before or after the additional information is produced. They may want to visit and discuss the case with the company to ascertain the most appropriate additional information needed

Assessing Financial Information:

Balance Sheet

Section 2.9 examples

Assessing Financial Information:

The Profit & Loss Statement and Balance Sheet – What It Tells Us

(Sections 1.13 of EOI and 2.9 of Part A)

P&L and Balance SheetsCOMPANY PARTNER ACCOUNTS

Please make clear the basis for the numbers (eg £k), and use comma separators (eg £34,567k)

Latest period Last audited year

Prior audited year

1 Period end date 3 mths to 06/07 31/03/06 31/03/05 2 Sales £1,791,933 £4,531,646 £3,197,000

3 Profit before tax £242,096 £398,015 £286,736

4 No of employees 23 23 23

5 Tangible assets £276,424 £287,864 £193,311

6 Investments and goodwill £100 £100 £100

7 TOTAL fixed assets (A) £276,524 £287,964 £193,411 8 Stock and work-in-progress £718,987 £528,327 £352,575 9 Trade debtors, prepayments £262,661 £260,713 £264,967 10 Cash and bank balances £441,696 £156,624 £54,222 11 Other current assets (identify) 0 0 0 12 TOTAL current assets (B) £1,423,344 £945,664 £671,764 13 Trade creditors and accruals £221,991 £203,573 £171,898 14 Bank overdraft and loans 0 0 0 15 Taxation and NI and dividends £308,953 £230,701 £107,473 16 Finance leases and hire purchase (less than one

year) 0 9,295 £14,460

17 Other current liabilities (identify) £1,697 £110,000 £49,692 18 TOTAL current liabilities (C) £532,641 £553,569 £343,523 19 NET current assets/liabilities (B - C) £890,703 £392,095 £328,241 20 Bank Loans and similar 0 0 0 21 Finance leases and hire purchase (greater than

one year) 0 £983 £10,000

22 Other long term creditors (identify) 0 0 0 23 TOTAL long term creditors (D) 0 £983 £10,000 24 Provision for liabilities and charges (E) £24,157 £24,157 £26,000 25 ASSETS EMPLOYED (A + B - C - D - E) £1,143,070 £654,919 £485,652 26 Financed by: 27 Share capital £10,000 £10,000 £10,000 28 Profit/Loss Account £1,133,070 £644,919 £475,652 29 Other (identify) 30 SHAREHOLDER FUNDS £1,143,070 £654,919 £485,652

Profit and loss summary (from last accounts date to this)

Balance sheet information On the date listed – a balance sheet is a ‘snapshot’ in time, usually taken as midnight on the last date in the period

Balance Sheet:Tangible assets Investments and goodwill TOTAL fixed assets (A)

Stock and work-in-progress Trade debtors, prepayments Cash and bank balances Other current assets (identify) TOTAL current assets (B)

Trade creditors and accruals

Bank overdraft and loans Taxation and NI and dividends Finance leases and hire purchase (less than one year) Other current liabilities (identify) TOTAL current liabilities (C)

NET current assets/liabilities (B - C)

Bank Loans and similar

Finance leases and hire purchase (greater than one year) Other long term creditors (identify) TOTAL long term creditors (D) Provision for liabilities and charges (E)

ASSETS EMPLOYED (A + B - C - D - E)

Financed by:

Share capital Profit/Loss Account Other (identify) SHAREHOLDER FUNDS

Assets that are used by the business NOT sold as part of trade, not generally ‘liquid’

Assets that are part of trading, generally regarded as liquid (ie easy to turn to cash!)

Debts and other liabilities that need to be paid quickly, usually within a year and from

current assets

Debts and other liabilities that are paid for in the longer term, often secured by fixed assets

Where all the money came from that is inherently in the business

This is ‘liquidity’ and should be positive!

This is ‘solvency’: if negative the business is ‘insolvent’

These should ‘balance’

The total long term debt as a ratio of assets

employed is

‘gearing’

Balance Sheet Measures - good and bad:

Liquidity:

A business with a positive liquidity, in excess of the annual costs of the KTP, probably has cash to pay its way!

Solvency:

A business with a positive solvency in excess of the costs of the project probably has the resources to begin the project

Gearing:

A business with a ‘low’ gearing probably has the security to borrow funds for investment etc.

Liquidity:

A business with low or negative liquidity may struggle to find cash

Solvency:

A business with negative solvency is insolvent (bust) and must legally have a rationale to continue and access to external funds to do so

Gearing:

A business with high gearing has already extended substantial security to others and may not be able to borrow more to fund investment (eg capital equipment) or for liquidity

Cash is King!

Companies need cash to pay debts, seize opportunities etc. However strong a company

apparently is on the balance sheet, it needs freely available cash* to survive…….cash flow

is the most frequent ‘killer’ of smaller businesses

NB watch for cash in NFP organisations which is ‘tied’ to a specific use. Look for ‘unrestricted’ funds

And Finally….• Don’t be frightened of figures! Find the ‘story’ they tell.

• Don’t be forced into making quick decisions by MD’s – take your time; ask for help from your Adviser or Finance officer.

• It’s in OUR JOINT INTEREST to work together to ensure due diligence is undertaken, that risks are not entered into unknowingly.

• Every effort should be made to ‘Make the case for Affordability’

Good Luck!

Thank You

Enjoy the rest of the Conference!