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.”

For more infor­ma­tion please vis­it xero.com