Taken for Granted?

Should the availability of a grant make any difference to what a commercially focussed company does? That question came to mind recently, as I was being interviewed by a university researcher looking at the impact of two different grant schemes from which we benefited. Partly I want to argue that a grant shouldn’t make any difference, but I recognise that if that were the case then the question “why do grant schemes exist at all?” leaps to the fore.

So – why do I say they should make no difference? Well, partly because that’s what accountants and lenders say. When recently raising finance, I was told that the lenders would ignore any grant revenue because it couldn’t be relied upon. Grants, they appeared to argue, are at the whim of the providers and can’t be forecast. The accountancy rules are just as capricious. A grant toward the purchase of a capital item should be recognised as revenue over the lifetime of the equipment, even if the payment has been made, and can’t be recovered. Having battered my head against the incongruity of that idea for too long, I don’t intend to defend or argue against it. My point is simply that accountants and bankers clearly take a dim view of grants.

Leaving those venerable professions where all right-minded entrepreneurs think they should stay (in the background!), I have my own personal objections. A commercially minded business really only proves it has value when a customer readily gives up the cash to pay for the service. This payment, above anything else, is evidence that the business is on the right track for success. Success, in my mind, being measured by the certainty of continued survival and (if desired) growth.

When a grant scheme is announced, the holders of the grant fund have a key measure of success, at least initially; that is to get someone to take up the grant. How different is this from the buyer of goods and services for which there is competition. Commercial buyers are focussed on getting value for money, good service, and differentiating between suppliers. Each sale is a victory that strengthens a business. Grant providers are successful when they find someone to take their cash. Getting a grant does nothing as far as strengthening the commercial muscles of a business is concerned. The business has (merely) to understand the hoops they face, and leap through them in an appropriate way. And ultimately, a business should not be based on the ability to perform a circus trick.

So, I’m arguing that grants are disliked by money men, and lead to businesses being so busy carrying out grant-required juggling tricks that they take their eye off the commercial ball. But is that really right?

Of course the government, and many others argue that that is not the case. And, in all honesty it is a simplistic argument, but I do think that the impact of a grant on a business needs to be well understood by all concerned.

One of the grants we received recently was a rebate on our rates. It was paid only if we took on a new employee. At the time we were struggling to improve our systems as we were too busy dealing with customers (a nice problem!) to make the improvements. But this was at the start of a growth period and the revenue and profits from those customers hadn’t yet flowed through. I was confident they would, but cash always lags. Then came the grant offer. Rates I already pay could (almost magically) be turned into money to pay wages! We began interviews whilst going through the grant application process and the day we received the grant confirmation, took on the new member of staff.

So, that’s my first rule for a grant, it should speed up what a business would have done anyway. Also, it should achieve the grant provider’s aim clearly and unambiguously – this was a grant designed to get more people into work – it did that quite demonstrably.

The other large grant we received was a Regional Growth Fund grant, to be spent on site capital investments. This supported our investment of nearly £300,000 of capital expenditure in the last year. Many of these investments were “nice to have”. The decision to invest was easier with a 50% grant payment, but on no occasion did the grant mean we made the decision to purchase. First came the view that there was value in the investment, then came the balance question “can we afford it?” Here the grant made saying “yes” easier. Yes to the now, yes with less risk.

So that is my third rule. Of itself, a grant should not drive an investment decision, but it should reduce the risk and pain of carrying out a desired plan.
These rules, though, require a hard-nosed approach. Faced with free money, it is easy to convince yourself that the rules have been met. So I would start at the end and say – “what is the business rationale for this investment?” If the answer is “it will get us grant cash”, then I’m with the bankers and accountants. Step away from the grant holder! Where the investment sits with the business strategy is crucial, the grant should merely act as something that reduces risk and speeds up action. A supporter not an enabler. If the grant removes all friction and all effort – the business loses muscle.

Now, many of my customers are in R&D businesses, and depend on grants during their early years. They might argue that I am wrong, that without grants they would never have moved forward. In my heart I still wonder if a string business can be built when based on grants, and I would be delighted to hear opposing or supporting views.