Some observations about the Jenkins Report and SR&ED…

It seems that the Harper government is about to introduce tax-regime changes based on last year’s Jenkins report (see http://bit.ly/qMhEpY). It’s important for governments to question government largesse and the effectiveness of its expenditures. But as stated previously in this blog, SR&ED may not be the most efficient way of stimulating R&D, but it does help create jobs in Canada and it does keep technology companies in Canada.  In fact, I’ve seen it reverse the tide of outsourcing for some companies.. It all reminds me of Winston Churchill’s statement about Democracy:  “Democrasy is the worst form of government, except for all those other forms that have been tried from time to time”.  It ain’t perfect, but without SR&ED it is almost certain that a large chunk of our technology industry would disappear.

The problem I see with SR&ED has largely been the enforcement (or lack thereof) and the complex, oblique and ambiguous rules surrounding the program. It just lends itself to exploitation the way it is being administered at present.

The changes proposed to SR&ED by the Jenkins report don’t seem all that bad: Base it more on labour costs; increase the rates (I like that part); reduce the amount of refundable credits (will surely encourage profitability); and make the pre-review process more of a pre-approval process. This all seems quite reasonable.

They should also create some more “bright lines” in the rules. For instance: If they’re going to make the credit primarily labour-hours-based, they should prescribe that time records be kept, plain and simple. No exceptions. Currently, you are supposed to have good supporting evidence, preferably in the form of time records, but they don’t prescribe the nature of the data to be kept in those time records (and believe me there is a lot of latitude in this area). And if you don’t have good time records, they will often let you hobble together other information to support the time claimed – but that often ends up being an “allocation” based on questionable methodologies. It seems to me that it would be virtually costless to always insist on seeing the time records, and to check that they at least meet some basic characteristics before approving a claim. That would save probably $3,000,000 of the approximately $3,500,000 the government spends on SR&ED each year. And who could reasonably argue against such a rule? The beneficiaries? Hardly. It is other peoples’ money after all.

Timesheets are your friend

If you do nothing else for your company, make sure that you and your employees are tracking time being worked by using a time system.  Some of my clients have been reluctant to track the time that they or their employees invest in their company.  This is not surprising, especially for small or fledgling companies – but it is a costly mistake.

Many of you already use a time system.  Even if that is the case, there may be people in your organization who are hard to convince of the merits of tracking time.  In fact, some professionals (mistakenly) view detailed time tracking as being “beneath” them.  Fortunately it is a simple matter to track time, and hopefully this article will give you the ammunition to convince others in your company of its benefits.  A little attitude adjustment in this area could have a significant positive impact on your company’s bottom line.

Reasons to track your time

Payroll purposes

The first and most obvious reason to track your time is for payroll purposes.  You’ll want to know that your employees are working full weeks, and they will want to make sure they are paid for all the time they put in (including overtime).  This applies to salaried employees as well as hourly employees.  In addition, you will be able to track things like sick time and vacation time.  This all seems so obvious, but it is surprising how many organizations don’t track these things carefully and are blindsided when someone takes excessive time off, for instance, or complains about working excessive hours without compensation.  You may not have all your HR policies defined, but if you aren’t even recording time worked, you’ll never be able to apply a policy.

Tracking time is good management.

When you track time, you’ll know where time is being spent.  It sounds so simple, doesn’t it?  You’ll want to know if your employees are working on value-added activities or not.  You’ll never know if you don’t start tracking and reviewing time spent.

Project Management

Any serious attempt at project management will involve time tracking and analysis.  When you start a project, historical time records are an excellent source of information on which to base estimates.  During the project, time records are essential in determining if you are going over budget or over schedule.  And finally, when a project is complete, a post-mortem analysis of time spent can provide clues for how to approach projects in the future.

Billing

If you are providing services on a time and materials basis, you’ll need to track your time carefully in order to bill your customers.  There is simply no substitute for having detailed time records for such projects.  Good luck trying to bill a customer if you can’t even track your own time!

If you aren’t working on a time and materials basis, but bill based on deliverables, you’ll still want to know how much time you spent so that you can plan and price appropriately.  Furthermore, if you spend more time than you planned/budgeted, that information may provide leverage with the customer.  They may provide concessions on delivery dates, for instance, or might be willing to pay more next time if they realize they “got a deal”.

Other Peoples’ Money

If you are getting money from other people to help fund your company, detailed time records are a tremendous asset.  Here are some examples:

Investors:

Time records can provide evidence of the “sweat equity” you and others have invested in the company.  Investors often want to see that founders/entrepreneurs have “skin in the game” before they’ll invest.  That doesn’t have to mean money.  It can be the long hours invested in the company for which little or no compensation was received.  If you can quantify that in a credible way (i.e. using time records), then you can easily demonstrate the time investment made in the company.

In addition to demonstrating your “sweat equity” investment, a small company which tracks its time carefully is demonstrating discipline.  Investors will be more likely to invest in a disciplined organization.  This is an easy win.

As shareholders, investors also want to see evidence that their money is well spent.  Companies will often have multiple rounds of financing.  The second (or third) time you go to the well for water, you’ll want to show your investors that their money is being well spent.  Time records are a great source of such information.

Government funding/subsidies:

Governments often provide subsidies and tax incentives to companies.  For instance, in Canada there is a lucrative government tax credit program called the “Scientific Research and Experimental Development” (SR&ED) tax credit.  In our province, that program can fund up to 68% of direct salary expenses.  To claim the tax credit, a company must be able to prove that it spent money on the eligible activities related to scientific research and experimental development.  They are reasonably liberal in their interpretation of the activities that are eligible, but if you can’t demonstrate the hours and dollars spent, you will not receive a cent.  My first advice to SR&ED clients is to start using a time tracking system.  It is easy to do, and can have an enormous payback.

Many government subsidy programs provide matching funds.  In such cases, you’ll need to demonstrate the exact labour hours spent in order to receive matching funds.   A time system is about the only way to do this.

Features

At a minimum, your time system should track hours spent by project and activity.  Every time record should be dated and should include a note describing what was done.  There’s not too much detail in today’s blog because this can become a religious discussion about time system features.   You don’t need a star-wars solution.   If you’re not tracking time already, a simple solution will suit you fine – and it will be easier to sell to non-believers.

Conclusion

There are many reasons not to use a time system, and all of them stink:  Entrepreneurs often give short shrift to tracking their time, if they do it at all, because they don’t see it as central to their efforts.  Even managers in larger, established organizations avoid tracking their time.  Perhaps they don’t want their superiors to know how much time they put into tasks.  Engineers don’t like to track their time because it isn’t as much fun as writing software or inventing things.

We often have a double standard:  We expect our subcontractors to track their time meticulously in order to justify their billings, but we don’t do so ourselves.  This is a pretty arrogant attitude, especially if we are hoping for funding from outside sources (government, venture capitalists, angel investors, etc.).

This article has offered many reasons why time tracking will benefit your organization.  There is probably no easier way to improve your organization’s effectiveness than by tracking you and your employees’ time if you are not already doing so.  What are you waiting for?