How innovation can power small businesses

The effective analysis of financial data can stimulate SME growth.

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Small to medium-sized enterprises – private companies with fewer than 250 employees – are the backbone of the United Kingdom’s economy. There are close to six million SMEs in the UK today, spanning a range of sectors, and while the big brands and corporations might grab headlines, they are the ones that keep the country ticking over.

According to the Federation of Small Businesses (FSB), SMEs made up 60 per cent of all private sector employment in the UK in 2018. Indeed, the scope and importance of these businesses should not be underestimated; and it seems reasonable to suggest that protecting them represents a rare area of cross party-consensus for policymakers going forward. If the UK’s decision to leave the European Union necessitates a sharper focus to be turned onto domestic issues – such as business rates and the regulatory framework – then making it easier for SMEs to start, grow and access support must be treated as a priority post-Brexit. Small businesses are a major source of employment in the UK, and by extension a source of productivity.

What role can technology play in growing SMEs?

The evolution of technology has already played a significant role in enabling small businesses. The physical IT infrastructure of the past is diminishing. Fewer companies are using filing cabinets, instead opting for cloud-based software and mobile devices. As the world moves into the Fourth Industrial Revolution, where consumers crave convenience and speed in the delivery of products and services, the UK’s SME sector has a responsibility to keep pace.

The UK is a great place to start a business – numerous government tax break and relief schemes have seen to that in recent years – but growing one here is more difficult. The challenge in doing so is rooted in cash flow, access to real-time insights and closing a business-based skills gaps. Xero, a cloud accounting platform which digitises various operational aspects of SMEs such as bank feeds, payroll, taxation and invoicing, aims to clear these hurdles. It wants to help SMEs to reach their potential, enhancing their products and services while exploring new markets that didn’t exist before.

So, how does it work? Xero connects businesses with the accounting tools, apps and the thousands of data points they need in one place, available at any time or on any device. The platform collects and collates information that businesses need – feeding into a centralised accounting engine which does not require human intervention. The lack of human intervention – keeping the data untouched – ensures that it retains its credibility. It is secure, trustworthy and accurate. The platform supports bank feeds and a company’s client base, while also using speedy digital entry of data to course payments and invoices.

What are the main challenges that SMEs need to overcome?

The motivation behind this sort of digitisation is more nuanced than simply slashing overhead costs. The transition from paper-based to paperless offices does save on space, but more importantly the streamlining of business operations leads to more up-to-date insights into performance and productivity. This has a net positive impact on both the business owner, who can make more informed decisions more quickly, and its consumers, who experience the benefits of a better product or service as a result.

As a cloud-based online solution, which also has a mobile app version, Xero delivers anytime access, anywhere, to an SME’s financial data. It also supplies a multi-layered approach to ensuring data retains its integrity when loaded into its accounting software, and helps ensure it remains air-tight and cyber-secure, all the while ensuring that the business owner needn’t be anchored to his or her desk. Moreover, on an ongoing basis, built-in controls and tools help alert users and their advisers if and when data has been changed.

Late payments, our research has confirmed, are the scourge of SMEs. Digitising the payment process, Xero’s Small Business Insights platform shows, is key to improving company efficiency and productivity. Currently, our statistics show that UK SMEs are owed, on average, £24,841 every day as a result of late payments. This is, in part, down to an embedded culture of late payments in the UK which needs to be challenged in itself. We would advise, generally speaking, to negotiate shorter payment terms as with a longer payment window, as there’s a greater chance that an invoice could potentially be lost or ignored in these situations.

Our research into late payments revealed that small business owners are spending an average of ten per cent of their day – which equates to two days per month – chasing late payments, with invoices an average of 14 days overdue before being settled. Asking for money can be awkward at the best of times, but it’s crucial that SMEs are more assertive when chasing invoices, because cash flow is ultimately not a concept they can afford to be flexible with. But beyond that shift in attitude, our technology again has a contribution to make. It can even automate the process of chasing an invoice, so SMEs can track their cash flow, stage by stage, in real time.

What are the roles of business, industry and government going forward?

Too often the idea of automation is clouded by misguided notions of replacement, rather than redistribution. The cost-cutting caused by technology should be viewed as a happy side effect rather than the driving force behind it. The idea underpinning such platforms is to help SMEs to thrive, sustainably. Where processes can be digitised, employees can be redeployed into other areas of the business where they might be better utilised.

Ultimately, for the UK to succeed as an economy post-Brexit, its entrepreneurial ecosystem must maintain and improve its already high standards. The support for startups must be mirrored by government investment into help and advisory tools for SMEs, encouraging them to pursue loftier ambitions. That investment into skills and training should come against the backdrop of a more tech-savvy business sector. Technology is an enabler of progress and platforms such as ours are primed to steady cash flow and empower companies through their insights. The future of the UK economy, with no trace of embellishment, hinges on its capacity to support its SMEs.

Gary Turner is co-founder and managing director at Xero.