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The role of the digital ecosystem to a small business

Balancing cash flow has always been a headache for small businesses. Many companies have to pay their staff’s wages before they collect payment for services, while others have to fund the cost of raw materials before their customer pays up.

It is estimated around £13 billion is owed to UK small businesses in overdue payments, while an alarming report by PayPal and Xero last year revealed that half of small-business owners have used their own money, or that of their friends and family, to keep their business going.

Meanwhile, small businesses can also find it challenging to access working capital. Managing their finances has historically been a significant drain on their time and energy.

These are major concerns when it is considered that small businesses are the lifeblood of the UK economy. Small and medium-sized enterprises (SMEs) account for 99.9 per cent of the business population in the UK and around three fifths of employment in the private sector.

Fortunately, the rise of cloud-based accounting tools in recent years has introduced an enormous amount of flexibility for small-businesses owners and changed the economics of accounting and compliance. Small business software platforms such as Xero have not only helped enable the government’s efforts to digitise and simplify tax administration through initiatives like Making Tax Digital, but also accelerated the speed at which businesses can get paid.

At Xero, small-business customers enjoy access to an ecosystem of more than 800 third-party apps and over 200 connections to banks and financial service providers.

According to Xero’s Small Business Insights, in January 2020 the average time it took for a 30-day invoice to be paid was 37 days. Customers that use payments services like Stripe or GoCardless, integrated with Xero, get paid 17 days faster.

“Xero is very active in working with companies across the financial service ecosystem to drive and support innovation for small businesses,” says Edward Berks, global executive general manager, financial partnerships, at Xero.

“Previously, if businesses required financial services or even just to move money around, their horizons rarely stretched further than their bank. A fintech revolution is changing that. Organisations like TransferWise now account for a significant proportion of cross-border payments and foreign exchange activities. Starling, Revolut and Tide all now have more than 100,000 small business banking customers in the UK. And in terms of lending, the likes of iwoca, RapidCash and Esme are providing alternative means for raising working capital.

We see lending applications turned around in hours versus a typical banking experience which can still be weeks

“Xero works closely with all of these companies and many more, totalling more than 800, providing huge opportunities to small businesses. We see lending applications turned around in hours versus a typical banking experience which can still be weeks.

“And all this is now powered by a seamless user experience. You don’t have to go back too far when people still had to physically go into bank branches to execute their payments and manage their businesses. Increasingly, all that capability is available on your smartphone. That really empowers SMEs to be more efficient.”

Last year, Xero announced major enhancements to payments on its platform to ensure small businesses can pay bills faster. Pay with TransferWise, the UK’s first domestic bill paying solution, will allow businesses to pay direct from their Xero account, no matter who they bank with. Features like one-click reconciliation and real-time view of payments mean small businesses understand the impact on their cash flow at all times while spending less time on administration.

Xero’s open ecosystem also spans a range of vertical solutions, working with specialist application providers in areas such as farming, with apps like Figured, as well as dentistry and retail, so that niche applications used to run companies integrate seamlessly with Xero. Businesses can very quickly account for transactions via an API (application programming interface) between Xero and third-party applications.

Open banking capabilities, having originally been driven by the needs of retail customers, are now being applied to help small businesses by allowing third parties to access their banking data. This means if a company applies for a loan, for example, rather than having to provide bank statements, it can simply authorise a third party to access its bank records, removing a huge amount of friction and time from the process.

“The next wave of open banking will be in payments,” says Berks. “The cost of taking payment and making payment via credit card can be high. Open banking will open up more options to pay and take payment via lower-cost, faster payments, which will enable new payment experiences, but also promises to ultimately lower costs for small businesses.”

Against a hugely challenging business backdrop, with coronavirus having a major impact on small companies, it’s never been more important for business owners to do everything in their power to balance cash flow in the right way. The most important group small businesses lean on, particularly when times are tough, is the accountant and bookkeeping community. Increasingly, they are asked to provide support with things like accessing financial services or the best technology tools to use. Their roles are evolving as a result to be much more advisory.

In light of this, accountants are embracing cloud technology to make their lives easier, give them back time and flexibility, and allow them to streamline bookkeeping, tax and compliance. Most accounting firms in the UK will use Xero in one way or another. And they are seeing the benefit of investing in the right fintech and business applications to manage their clients’ finances better.

“That advisory wave is hugely catalysed and enabled by cloud accounting,” says Berks. “The fintech scene in the UK is really exciting. We are working with the best of the banks and fintechs to give customers more choice and to remove friction from the tasks they face every day.

“The reason a lot of our customers buy Xero in conjunction with their accountant is to ensure they can file tax and be compliant in areas like payroll. As a by-product, they get a rich up-to-date digital set of accounts that provides a clear picture of their financial performance and projections, giving SMEs a constant view of their health and cash flow, and fuelling better decision-making.”

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