Getting match fit

The UK is now one of the easiest places in the world to launch a business. More than 1,100 new businesses start each day, according to Government statistics.

This is a great achievement and we should recognise all that Government has done to help those who want to set up.

Now it’s easy to set up, more needs to be done to help businesses to grow and scale up.

That points to fixing Britain’s productivity puzzle.

To address this issue, the department for Business, Energy, and Industrial Strategy recently launched the business productivity review.

Its objective is to make low productivity businesses in the UK more productive.

What we see through the hundreds of thousands of small businesses that use Xero are the practical issues that need to be resolved.

Barriers to growth break down into three broad areas: access to capital; competing on a level playing field; and, closing the business skills gap.

First, access to capital.  Our research shows that of the 50,000 businesses that fail each year due to cash flow issues, some 65 per cent of these blame access to funding.

Data from Small Business Insights, our monthly snapshot of the health of the UK small business economy, shows that cash flow remains a problem.  Less than half of small businesses are cash flow positive in any month.

Quite often the working capital they need is tied up beyond their reach, with late paying customers.

Small Business Insight also shows that on average, invoices with 30-day payment terms are paid in 40 days.  FTSE 350 companies pay in 46 days on average, or more than two weeks late.

In short, bigger firms with deeper pockets pay more slowly!

In addition to the immediate cash flow issue, late payments affect the SME’s financial profile, harming the firm’s credit score and making it harder to raise funds.

Now small businesses are obligated to meet all sorts of official requirements, we believe the time has come for large firms to be obligated to pay on time.

Second, we need to make better use of technology to help reduce the administrative burden on SMEs and give them access to the kinds of products and services that large firms enjoy.

For instance, cloud computing helps SMEs understand their cash flow, making it easier for business owners to know where they are with their finances.

This also makes it easier for banks and other lenders to access real time data on small businesses, helping SMEs raise funds.

To help reduce the overall burden on SMEs, the Government should offset any additional legislation that impacts SMEs by reductions elsewhere.

Third, we need to help SMEs get the skills they need.  Accountancy and bookkeeping are prime examples.  Our research shows that 58 per cent of successful small businesses use financial software against 14% of businesses that fail.

Our research also shows that firms that use such software and access such skills have higher long-term survival rates.  Some 88% of Xero customers are still operating after five years, compared to just 41% of the UK average.

To help instil these skills, SMEs need to be better informed and encouraged to explore and take up business technology that can simplify management of their business.

Working capital at the right time, levelling the playing field and closing the skills gap will mean that small businesses can be better equipped to not only survive but thrive.

Gary Turner is MD of Xero

You can read responses to the Government’s business productivity review online at GOV.UK.

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