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SEIS Application: 6 Simple Steps To Build Rock-Solid Financial Forecasts

If you are a UK early-stage startup, chances are you have already heard of the Seed Enterprise Investment Scheme (SEIS). If you haven’t yet, you should seriously consider applying.

Indeed, successful applicants to the SEIS scheme will be able to provide individual investors with significant tax breaks, making your startup even more attractive from an investment standpoint, and maximising your chances of fundraising.

Yet, SEIS application isn’t straightforward and requires some preparation. From your pitch deck to your financial projections, HMRC has a strict set of requirements for the documents you need to submit. In this article, we explain you how to prepare financial forecasts for your SEIS application in 6 steps.

Note: for a guide on how to prepare your business plan instead, read our article here.

What is SEIS?

The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 by HMRC to help small businesses and startup to raise capital. It provides a series of tax breaks for individual investors who wish to invest into qualifying companies.

The SEIS is an addition to the Enterprise Investment Scheme (EIS) that was launched in 1994. For those who were wondering, whilst SEIS focuses on small businesses and early-stage startups, EIS targets medium-sized businesses instead (up to 250 employees). For a detailed list of the differences between SEIS and EIS, refer to this article here.

What are the tax benefits of SEIS?

The SEIS scheme offers a number of tax breaks to individual investors, from automatic reductions to loss relief and capital gains avoidance. In order to benefit from these tax breaks, investors need to hold qualifying shares for at least 3 years.

The tax breaks included within the schema are:

  • 50% Individual Income Tax relief (of the amount invested)
  • Exemption from Capital Gains on earnings from shares
  • Exemption from Capital Gains on profits realised within 3 years if reinvested in the SEIS
  • Loss relief if the company fails (even within the 3-year hold period)

The positive impact of these tax reliefs are significant for investors. That’s why investors often ask upfront founders raising capital if they are SEIS compliant.

Note that the maximum lifetime amount that can be raised on under the SEIS scheme is £150,000.

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SEIS tax breaks: 3 examples

Let’s see how the SEIS impacts individual investors’ taxes in 3 different scenarios: when the startup goes bankrupt, breaks even and double in value within 3 years.

Let’s assume an individual investors makes a £1,000 investment in a startup who is eligible for SEIS.

Because of the 50% Individual Income Tax relief, the investor gets £500 in income tax relief. Assuming a 45% income tax rate, the income taxes from the 3 scenarios above are:

Startup goes bankrupt

Income = – £1,000 (the shares are worth £0)

Tax relief = + £500

Loss relief = + £225 (40% x £500)

The investor makes a loss of £275 (instead of £550 without SEIS)

Startup breaks even

Income = £0 (the shares are worth £1,000)

Tax relief = + £500

The investor makes a gain of £500 tax free (instead of £0 without SEIS)

Startup doubles in values

Income = £1,000 (the shares are worth £2,000)

Tax relief = + £500

The investor makes a gain of £1,500 tax free (instead of £1,000 without SEIS)

How to apply?

To know whether your startup (or more precisely, the investment round you intend to raise) is eligible to SEIS, you should first check HMRC’s list of eligibility criteria. If you think your startup is eligible, you should now apply.

The application to SEIS is also referred to as Advanced Assurance: you ask HMRC whether your proposed investment may qualify for the SEIS scheme. You can then use this to show your potential investors that your proposed investment is eligible to SEIS, so they may be able to save income taxes.

Beware: the Advanced Assurance does not fully guarantee an investment will be eligible for the SEIS for any investor. Instead, startups apply for the SEIS Advanced Assurance to give a provisional indication of whether it may be eligible to apply for tax relief for potential investors.

Amongst the list of documents you will have to provide as part of your application are your business plan and 3-year financial forecasts. We have covered which slides you should include in your business plan. In this article, we will cover below 6 simple steps to build rock-solid financial forecasts for your SEIS application.

Note: SEIS Advance applications are usually processed within 3 to 6 weeks.

SEIS application: the 6 steps to build rock-solid financial forecasts

We have listed out below 6 simple steps to build rock-solid financial forecasts for your SEIS application. If you are looking for a template instead, be sure to check out our templates here.

Step 1. Start from your actuals

Before you start creating financial forecasts for your business, you should first look at your actuals. From there, we will identify and extrapolate a number of drivers which will allow us to project your revenues and expenses later on.

You don’t necessarily need now to start from your entire profit-and-loss or cash flow statement you would have exported from Xero for instance. Instead, identify what drives the most of your business’ performance: is this the number of customers you have? Is this the commission rate you are charging your customers?

The key drivers will help us estimate your financial forecasts later on. As such, they need to be clearly identified. A few examples of drivers for 3 illustrative businesses are:

  • Retail: number of customers, average order value
  • Ecommerce: number of visitors, conversion rate, average order value
  • SaaS: number of users, churn, average revenue per user

Once you have identified your key drivers, include them as a start to your model. For instance, if you are generating £10,000 sales from 3,000 orders in a given month, your key drivers in that month can be:

  • Orders per month: 2,000
  • Average order value: £5.0

Step 2. Build your revenue model

Before we estimate revenue based on the drivers discussed earlier (step 1), we need to clearly identify what is your revenue model. Surprisingly enough, one business can have multiple revenue models. For a refresher, read our article on the 8 most popular revenue models.

For example, if you sell subscriptions to customers (e.g. gym membership) yet you also sell one-time services (e.g. dedicated sessions with trainers), these should be listed as two separate revenue models as they work differently. The subscription is a function of the number of users you have, multiplied by a recurring monthly fee for instance. In comparison, sessions are a function of a portion of your users, multiplied by another one-time fee.

Once we have identified your revenue model(s), we need to build out revenue for each of them. Using our gym membership above, subscription revenue will be a function of the number you have over time times the recurring fee. For sessions instead, use a percentage of users who pay for a session each month (based on your historical if any) – for instance 5% of total users – and multiply it by the total number of users and the one-time session price.

The gym membership example above help us understand why we need the key drivers we brought up earlier. Revenue projections should never be a plug – a guessed number from you. Instead, revenue is the function of multiple drivers. There are always at least 2 drivers for each revenue model: volume and price.

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Step 3. Forecast your variable costs

Variable costs are expenses that increase or decrease based on the level of sales and/or another factor (e.g. customers for instance). As such, they can’t just be flat over time, instead their amount will vary based on other parameters of your financial plan.

Common variable costs are:

  • Raw materials
  • Advertising spend (e.g. paid ads)
  • Packaging and shipping costs (ecommerce)
  • Transportation
  • Corporate taxes

If you have historical performance, use your actuals to forecast variable costs. For example, if you pay £10 in shipping costs in average per order, use the same value for your projections.

Instead, new businesses will have to find information either with industry benchmarks, public sources (cost-per-click for paid ads spending can be found for any keyword on Google Planner for instance) or quotes from potential suppliers.

Step 4. Estimate all your fixed costs

Fixed costs in comparison, are easier to estimate as they remain fixed over the projected period. Common examples are:

  • Salaries and benefits (for each employee)
  • Website hosting
  • Bank fees
  • Rent and utilities

Salaries and other payroll expenses often constitute the bulk of fixed costs. In order to accurately forecast salaries you need to estimate the right amount of people you will need over time, and their salaries. Average salaries for specific jobs and geographies can easily be found in industry benchmarks. The number of people your business will need depends on their function: some teams will increase or decrease based on certain metrics such as revenue (sales and customer success teams often grow in line with revenue) whilst others will remain stable (administrative functions e.g. finance).

Read our article on how to build a flexible hiring plan in Excel for your business for more information on how to efficiently forecast salaries expenses as your business grows.

Step 5. Putting it all together

Once you have projected revenue and expenses based on your key drivers, you can now consolidate it all under your profit-and-loss. Subtract all expenses (fixed and variable) as well as startup costs from revenue to get to net profit.

To calculate your cash flow statement, no need to do anything complicated at this stage: simply use your net profit, and subtract any other cash items (i.e. capital expenditures), for instance the startup asset purchases discussed above (step 2).

Step 6. Review and adjust

After having built your projected profit-and-loss and (simplified) cash flow statement, take time to review your estimates. Do they make sense to you? Is there anything surprising in your projections?

The review of your financial forecast should help you determine 2 things:

  • Are your projections error-free? It’s easy to get lost in spreadsheet and make mistakes in your calculations.
  • Are your projections realistic? Now that you take a step back to look at the big picture (revenue, growth, margins, cash flow), it’s easier to assess whether your projections are unrealistic or not.

In order to build realistic projections for your startup and know how to compare them vs. industry averages, read our articles below:

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✓ Tutorial + how-to video
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