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Welcome to the fourth MyCake benchmark
bulletin. This is the second of two issues
focussing on companies of 2—10 people who
are working out how to deal with change
in their markets and the opportunities for
growth in a recessionary climate. In this
bulletin we’ll focus on how you fund your
own research and development so you can
drive the direction of your business rather
than just dance to the tune of client briefs.

What is R&D? As the company matures a little you might

The simple answer is that it depends on the stage of
development of your business but in essence it’s the
investment of current profits into developments that
are intended to secure the future of the business by
delivering new products and services to meet current
or anticipated market needs.
If you’re a young business it means find-
ing enough profit to invest in the development
of the next few products i.e. a jeweller, fashion
designer or product designer may well need to come
up with a new range once or twice a year. In this case
you’re developing new products but you’re not really
investing in the future of your business models.
start looking at licensing or outsourcing of
manufacture. You would do this to increase your
profitability and to create space in the business so that
you’re no longer spending your entire time making and
selling.
There is a difference between R&D that is
focussed on the organic growth of the company
vs. the type that will attract (and indeed require)
external investment. If you are looking for the lat-
ter then you will need to be looking at products and
services which have a much higher profit in the long
run … in the realms of 10x the development cost.levels
and where the space to increase R&D spend within the
current model may be.

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It is increasingly common to undertake R&D in col-
laboration with your clients. Perhaps you spot an
opportunity based on one or more client conversations
and instead of looking for the funding separately to the
route to market you approach a key client and discuss
how they might invest in the idea in return for benefits
that accrue to them as and when it is successful?
MyCake benchmark data shows us that for the SME
firms who’ve submitted 2008—09 data there is very
little in the way of Research & Development (R&D) in-
vestment in the company—across all the data sets the
average is 1.1% of turnover with the maximum at 6%.
This is against a back drop of an average of 28.5% net
profit (again as a percentage of turnover).

You might of course take the decision to stop at stage
1 or 2 and not look for investment. That is absolutely
your decision to take and we’re not here to say that
really if you’re serious you should be moving to stage
3. However you do need to be clear on the potential
(and indeed limits) of the approach you’re choosing
and we’re here to look at the levels of investment of
your retained profit that you’ll need to make available
to the business if you are to invest in it’s long term
sustainability.
MyCake stats—what the numbers
are telling us
So, let’s take a detailed look at the MyCake bench-
mark statistics and what they indicate as regards cur-
rent profit levels and where the space to increase R&D
spend within the current model may be.
Research 1.1% Misc 3%
IP 0.1%
Pension 1.3%
Utilities 1.5%
Bank charges 1.6%
The chart below shows the percentage of turnover
spent on indirect costs … not many folks spend
money on pensions in the creative industries but even
this has a greater spend than R&D! And as for spend-
ing more on bank charges than R&D which has the
long term (or even short term) value …! In fact we were
so shocked by these figures that we had a chat with
ACID (Anti-Copying in Design) to find out whether the
MyCake user base invests less in R&D and IP than
their membership. As it turns out this figure of about
1—1.5% seems to hold true for their membership as
well. We’re wondering whether this low investment is
because the perception of the cost of protecting IP
is that it is too high and not worth it. Dids McDonald
(CEO of ACID) recommends the following if you can’t
afford the lawyers and formal protection route—
“IP registration is desirable but if
you can’t afford to register your IP, create
an IP audit trail and shout about it! And
if you don’t want to be copied, say so!
There’s no better place than on the front
page of your website and your marketing
material, creating a 24 hour burglar alarm.”

Insurance 1.8%

Wages (excl drawings)

Telephone 2.2%
27.8%
Office costs 4%

Travel 7.1%

Professional
Fees 7.6%
Rent/Rates 11.8%

Marketing 9.6%

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Is there enough profit to fund R&D? In the some 40%. In a product business it looks rather
service based businesses the answer is definitely different. Those businesses whose cost of production
yes. Those whose cost of production is less than is greater than 35% of turnover have, on average, a
10% of their turnover have, on average, a net profit of net profit of only 2.5%.

NEXT PETROL
647 miles

Up hill marathon
great views, sherpa
(investor) optional

Do you want your reward only once

but now? Or will you push yourself
further and aim to build something that
can reward you time and again?

Where is the difference between these   £ 20,000 in indirect costs has a higher profit margin.
two business models?
Well the expenditures on wages (about 27—30% of
turnover), rent (8—16% of turnover) and other indirect
costs are fairly similar. This indicates that the cost
of ‘turning the lights on’ actually doesn’t vary much
between these models but the cost of production,
particularly in the very small businesses is dramatically
different. This is one case where small is not beautiful
as there are simply no economies of scale in the de-
signer maker and product design crowds below about
£ 100,000 turnover. If you are selling high value goods
one might think that this matters less but that’s not
necessarily the case either. For example a gem based
jeweller with a turnover in the region of £ 100,000
can easily spend 50% of that income on materials
and a further 40% on indirect costs leaving a measly
£ 10,000 of income. A non-gem based jeweller turning
over £ 50,000 with perhaps £ 10,000 in materials and
It’s fairly unlikely that you’ll be able to put your prices
up for your existing products so that leaves you with
the challenge of getting your cost of production down
if you are to increase your profit margin (in order to
fund R&D). This means that either you need to in-
crease sales volumes so that the cost per unit comes
down or you need to re-engineer the product so that it
is cheaper to make (whilst retaining the value and thus
the sales price). If these are not wildly workable solu-
tions, ask yourself whether you can use your brand in
a diffusion range or license the production and distri-
bution to a larger company in return for a royalty.
The bottom line is that with a profit margin of less than
5—10% you’ll struggle to invest in the company’s
growth let alone pay yourself sensibly or contribute to
a pension!

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Ok, so I’ve got the profit margin sorted,
how do I ring fence monies for R&D?
Well the main thing is that you need to make sure
that you actually spend the time and money you allo-
cate. It is all too easy to prioritise paying clients ahead
of your own development. In the short term this is not
too surprising but as discussed above it is the long
term sustainability that we’re looking at here.
Here are some tricks you can employ to develop a bet-
ter balance between short and long term:
• Treat R&D projects as if they were client contracts—
so set deadlines, allocate staff (good working time
not evenings and weekends) and report on them in
team meetings and/or to your mentor or business
coach
• Ring fence the funds and report on actual spend on
R&D vs the allocated budget
• Set a target for the number of new ideas you want to
generate in the first round … perhaps incentivise
staff, freelancers and associates to contribute to this
• Aim for not more than three ideas to develop and
pick a mix of low risk, quick and cheap to develop
alongside bigger vision, more costly and long term
stuff
Why is investment in R&D  
important for creative industry
businesses?
Early stage creative businesses tend to be built
through the delivery of projects for clients. So unless
you’re a spin-out, or you’ve achieved start up invest-
ment/funding you will need an income stream to pay
the rent and to give yourself a paid reason to harness
your creativity. The risk of this route is that paying
project work can quickly swallow you up … when you
started you had a vision, ideas about the difference
you could make in your chosen field but now you’re
head is full of worries about keeping the pipeline of
new work flowing and you’ve not much space for big
world changing ideas anymore. Research and devel-
opment of your own products and services (not just
ideas to meet the client briefs) is one way out of this
cycle.
Furthermore, if you are to grow a long term sustainable
business, you need to do more than just your ability to
fulfil clients’ needs. If you don’t and just keep moving
from project to project you will risk being under-cut by
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• Perhaps involve a client as a test case and there-
fore make yourself accountable to them for dead-
lines. Make promises that you have to keep!
• Make a director responsible for R&D just as some-
one is responsible for finance or marketing or HR.
• Write it into people’s job descriptions and rewards
packages.
• Plan to phase out some of your older products or
services and set dates by which you want this to
happen. This means you’ll have to replace them with
new things and will speed up the process.
• Make income projections that include the new
products and services. At least some of this new
income will go to pay staff and overheads but perhaps
it will also result in a pay rise for the directors.
… and finally, as Dids McDonald of ACID points out:
“IP should sit in the same fund pot as R&D.
After all, if you research, develop and
bring new products or services its folly to
ignore any IP you have created.”
newer entrants into the market with low overheads and
the willingness to pull all-nighters … look at the low
entry costs to becoming a website developer; look at
the proliferation in printed tableware ceramics. It used
to be the front end of the trend in terms of accessible
every day design and so folks would pay £ 20—30 per
plate however now that the mainstream retailers have
got their own lines prices have dropped to under £ 10
a piece. The message here is one of making active
choices rather than have change happen to you when
you’re busy elsewhere. It is also worth noting that
in these tougher economic climes it is all the more
important to retain and develop your profile and USP
(unique selling point). The good news is that in some
ways it is a little easier to do now as the rate of change
has slowed a little and furthermore whilst failure is
never popular it is more acceptable (and therefore so
is risk). Indeed innovation is genuinely a mechanism
to split away from the competition whereas in a boom
time innovation is risky if it takes you away from the
mainstream.
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What are the ways to fund R&D?
To fund these ideas you need to ensure that you’re
pricing yourself high enough to leave profit to channel
into your research and development. This is the work
that feeds you creatively and intellectually. Structure
your client relationships right and they might even pay
for or partner you in the development.
The good news is that from what
we can see in the 2008—09 My-
Cake benchmark data sets there is
profit enough to be funding at least
some of your R&D plans.
There are a couple of other things to add to the list of
things to think about when considering the balance
between bread and butter income and the work that
feeds you creatively and the relative importance of
each in any three to five year period … in particular
the speed with which the market (and technology) are
Making best use of your   innovation so much the better … after all this gives you
R&D spend:
Short Term
If your old business model isn’t scalable enough
to make you an investable proposition how can
you use your clients, skills and experience but channel
them into something bigger, better, faster, more? This
is where you need to spend your own money on early
stage R&D if you are to get investment to cover the
later (and often larger) costs. You might be able to ac-
cess some small grant funds depending on your sector
and location but ask yourself which is the better use of
your time – applying for grants or doing the develop-
ment? If you can afford to fund your own early stage
work it will probably be quicker to do just that rather
than seek grants to cover it.
A slice of your retained profits, plus spare capac-
ity in staff time, are probably enough to fund early
developments on one to three new product/service
ideas. It really depends what market you are in as to
whether you can get a product to market and thus to
proof of concept (and ideally paying clients) on this
level of investment. If not either you are looking for an
investor to back you or you are looking for a client who
needs your innovation enough to pay for it. If you can
structure a deal with a client where they invest in your
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changing and therefore the speed which you need to
be able to move in order to stay ahead of the game.
When the market is moving slower than your ability to
develop, you retain the window of opportunity. If how-
ever the market moves faster than your ability to invest
in your own development then you risk getting left be-
hind. In these circumstances either you don’t
bother to invest in R&D, stick to delivering
client projects and just make sure you
keep up to speed with what others are
doing or you seek investment into your
R&D pipeline so that you can move further
faster. So the simple question is – do you work in a
sector full of innovation? (and is everyone who leads
the sector doing R&D in some form?) Innovation is
an early indicator of growth in the sector as well as in
companies and suggests that the pace of change is or
will be increasing.
both the money and a route to market, it doesn’t get
much better than that!
Ok, so you’ve increased your R&D spend beyond the
average of 1.1% up to perhaps 5—10% of turnover
and you’ve got two to three innovations to a pilot or
prototype stage. These innovations are of varying
scales (i.e. a cheap and easy one that’s quick to get to
market but might not have a long lifespan as well as a
world changing long term one that will eat cash for a
while yet before it returns anything). You also have one
or more clients lined up either as partners/investors or
as first tests who want to pay you to deliver to them.
What next? Why would you want to attract an investor
and what benefits do they bring?
Long term
The simplest answer is that by spending someone
else’s money you are sharing the risk with them
(in exchange for a slice of the returns) and the investor
must have deeper pockets than your company’s
current ability to fund it’s own next stage of R&D.
How much deeper do their pockets need to be? Well,
it needs to be enough to fund you to get the product
or service to market and this cost includes marketing,
launch and some ongoing development … there’s no
point for either party if the money isn’t enough to get
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you to market … that would be all risk and no chan-
nel for sales! As we mentioned before it is also about
keeping you moving faster than the market, after all if
you can’t keep up with the pace of change you’ll strug-
gle to sell your solution to the clients.
There is of course more to this than just the cash that
an investor brings. It is also about their experience in
your sector and their contacts. Unless they understand
the dynamics of the market you operate in it is unlikely
that they’ll fully understand the reasons for the deci-
sions you make and what you need is a critical voice
but one that can see how to achieve the vision you
share.

Conclusion
In summary, R&D is pretty darned important if you
want to actively develop your company rather than be
at the mercies of markets that others are making. The
MyCake benchmark data shows that the service based
folks can afford to invest in R&D as there is enough
net profit. Some of the product folks can also afford
R&D and if you’re in either of these camps then frankly
what are you waiting for? If you’re one of the product
based folks who simply isn’t making enough profit to
have anything left over (and by the way perhaps you
used to make enough but it’s possible that the mar-
ket has changed whilst you’re not looking and things
are no longer as profitable as when you last looked)
then you need to take a long hard look at your ranges
and see which pieces are profitable and which aren’t,
which have the capacity to be sold in larger volumes
or licensed to others for a royalty. You need to find
5—10% of your turnover to fund your R&D either in
part or to a sufficiently developed level for it to be at-
tractive to external investors.
Lastly don’t put all your eggs in one R&D basket by
which we mean don’t just develop one product/service
or range as this is betting the company on a single
route forward. Instead you would be better of to have
two to three things that you’re developing with various
levels of risk and return in each. That way you can
afford failure as well as enable success.

e.org 
m yc a k
sarah@

All MyCake users can access their individual benchmarks

once logged in at www.mycake.org. To benchmark your
business during your free trial (rather than wait until an-
other year has passed) why not enter the data for your last
financial year? If you are a sole trader your Self Assessment Tax
return will contain most of the data you need to do this. If you
run a limited company then your last set of annual accounts will
provide the necessary information.

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