Originally published in the Technology Spectator
Start-ups and small-to-medium enterprises have many enviable characteristics, but healthy cash flow is not often one of them.
Australia has recognised this point for quite some time and has put billions of dollars into this area.
It’s not alone. Governments around the world recognise the importance of the start-up and SME sector. As the OECD Science Technology and Industry Scoreboard notes, “firms five years old or less generated on average nearly half of all new jobs over the past decade”.
Not only do governments recognise the value start-ups bring for job creation, but also the immeasurable value they bring to the economy via innovation and thinking outside the box.
To this end, governments have been pumping money into research and development, with Australia leading the charge.
Start-ups in Australia can benefit from a 45 per cent cash back benefit purely based on R & D expenditure, rather than on any revenue measure.
Elsewhere, Portugal, France, Canada and the UK are among the biggest supporters of R & D for small profitmaking entities.
In general, R & D support is provided via tax incentives. Now, start-ups and SMEs must consider whether they will see increased tax credits, or ‘super-deductions’, or if governments will take a true leap of faith to offer incentives in cash.
The Australian Government recognises the need for start-ups to have short-term cash and has supported them by giving the highest cash back percentage of any country and has only a short delay between submission and receipt of cash.
The OECD Scoreboard says that five times more indirect cash (cash received from all government incentives, not just R & D) was pumped into the start-up and SME sector in Australia, compared with direct investment such as private funds and venture capital.
Countries such as France, Canada, Norway, Australia and Austria offer the loss-making start-up at least the same R & D tax incentive benefit, and in certain instances a greater benefit, in recognition of the fact that short-term assistance is required and that increased tax losses that may only materialise in three to five years’ time are often futile as the company may not last that long without a cash injection.
Indeed, Australia offers loss-making start-ups a greater benefit than their profitmaking peers, as the 45 per cent actually comes back in cash.
OECD innovation surveys for 21 countries showed that firms receiving public support for innovation invest 40 per cent to 70 per cent more than those that do not. And the more a firm invests in innovation, the higher its sales and productivity.
What’s more, a start-up that has successfully accessed the Australian R & D tax incentive, and other government incentives and grants, has a higher chance of raising private capital. Investors see the incentive as a risk mitigator and it further shows the company’s awareness of different avenues to attain funds.
Unfortunately there is a perception that R & D is either done in a lab or exclusive to the IT sphere. SMEs are missing out on assistance that could really make the difference in the future of the company.
Manufacturing, mining, health and medical, tourism, fashion, and food and beverage are among the industries that benefit from R & D tax incentives globally.
Australian start-ups and SMEs are in the front seat, with the government offering an R & D tax incentive that is competitive on the world stage.
All Australian businessmen and women should be taking advantage of this opportunity to kickstart their innovation.