The past few months have seen a steady flow of official data suggesting that GDP is up, unemployment and inflation are down and that the UK is growing faster than most other EU member states.
Indeed, both our latest UK economic outlook and the Fraser of Allander economic commentary confirmed that Scotland’s 2014 GDP performance outperformed all other regions outside of London.
So with all that reassuring information, it seems surprising to learn that eight out of 10 companies fail within 18 months of opening their doors.
Richard Branson blogged this Bloomberg data last year, stating that while there is no hard and fast rule that distinguishes the two-in-10 businesses that survive from those that fail, for him, the number-one company killer is finance and specifically cash-flow problems.
Money is the root of all…
From our experience of the SME (small to medium-sized enterprise) accounting minefield, money is often at the root of most failures. Quite simply, turnover isn’t profit, and profit isn’t cash.
Research tells us that people start a business because they believe their idea is marketable; they want to be their own boss, and have money and security. But once the business is up and running, early-stage businesses tend to rely on key people who play a variety of roles from non-executive director, part-time accountants and even angel investors.
Crucially, when it comes to managing the company accounts, a significant number of small businesses simply present their local accountant with a bundle of receipts and bank statements, enabling them to compile the year-end tax return. Even those who keep their books on computerised accounting systems need professional support at the year end to ensure that their data is accurate and complete, so that they pay the right amount of tax.
Taking a look at those businesses that may come under threat, we identified managers and directors who fall into four distinct categories. Those who:
read the management accounts, but don’t understand them;
produce accounts for the bank, but don’t read them themselves;
give the accounts to the external accountant and assume they understand the business; or
don’t produce any management accounts other than year-end statutory accounts – and don’t understand those either.
Where big companies have people and systems that provide real-time data in a format delivering insight and informed management decision-making, this is often a luxury too far for smaller firms. As a result, they grow more slowly, miss market opportunities and fail more frequently.
Let’s get digital
March’s Budget will change the relationship between business and the UK tax authorities forever, with digital filing heralding significant implications for a vast number of undertakings from the local plumber to large corporates.
By directly linking business accounts to HMRC, it will make it easier to pay tax on an ongoing basis, while the removal of the January tax rush could even help businesses get back up and running much quicker after the festive period. But how will the “bag of receipts” business adapt to this change?
According to the latest figures, there are around 330,000 SMEs operating in Scotland, providing over 1.1million jobs (55% of Scotland’s total private-sector employment) and over the last year, there was a 4% increase in the number of businesses registering for VAT and/or PAYE.
While any reduction in red tape is welcome, the risk is that the vast majority of small businesses are not in a position to maintain accounting records to the levels required. They are likely to need significant systems improvement and training, itself a financial and cost burden.
Every cloud has a silver lining
In contrast to traditional desktop and server-based accounting packages, cloud-based systems such as our My Financepartner can help businesses react more swiftly to market or fiscal changes, such as this new revolution in self-assessment reporting.
Combining the roles of accountant, financial controller and business adviser, cloud-based support systems can help banish spreadsheets in favour of real-time graphical, dashboard-driven data. And with an affordable cost structure, they can also deliver a combination of great technology and hands-on advice, enabling bosses to focus more on maximising profit and growing their enterprise.
In a year that could see businesses face up to four separate Budget processes from both UK and Scottish governments, having a cloud-based system like MyFinancepartner in their corner could help SMEs keep one step ahead of the changes.
By James Hoare, MyFinancePartner leader PwC in Scotland