The twin impacts of the credit crunch and overbearing regulation are beginning to take their toll on the SME business sector – the engine of the UK economy. Research issued last week by Pegasus the mid-market business and accounting software vendor suggests that even before the credit crunch took hold, SMEs were making a conscious decision not to grow because of the legislative regime in which they operate. The knock-on effect of this, says Pegasus, is a lack of innovation, a slow-down in job creation and unfulfilled potential to boost the UK economy – a position exacerbated by the credit crunch. Gary Simon, FSN’s managing editor looks at the issues and considers whether technology can help small businesses ride out the storm.
SME’s sinking under the weight of regulation and the credit crunch
The SME (Small and Medium Sized Enterprise) sector is a critical segment of the UK economy. According to the Department for Business, Enterprise and Regulatory Reform (BERR), SMEs accounted for more than half of the employment (58.9%) and turnover (51%) in the UK in 2006. Employment in SMEs has grown by 1.2 million since 1997 and innovation has also grown in importance, with 48% of SME employers stating in 2006 that they had undertaken product or service innovation in the past 12 months, compared with 32% in 2005.
Clearly, encouraging SME growth is crucial to the health of the whole economy, but according to the research commissioned by Pegasus, Government targets for cutting the amount of regulation facing SMEs do not go far enough. The research, which polled 450 SMEs, highlighted that one in four admit to spending more than two months of the year focused on researching and complying with legislation, and the vast majority of those surveyed (92%) believe that excessive red tape hinders entrepreneurialism in the UK.
The Government is pressing the EU to make small businesses with less than 20 full-time employees 'regulation free' zones, and also telescope legislative changes into one or two days every year to enable businesses to plan ahead and save money. However, business leaders' groups still reeling from the increase in capital gains tax to 18% and the introduction of taxation for non-domiciled business managers did not greet the announcements with overwhelming enthusiasm. The Pegasus commissioned research found that one in three UK SMEs felt the government's response was little more than lip service, while 40% considered that the measures simply don't go far enough.
Kevin McCallum, commercial director, Pegasus Software told FSN, “It is encouraging that the government is taking steps towards reducing the regulatory burden on SMEs, but these findings highlight that there is still a long way to go. As many SMEs spend several months each year on compliance, at the expense of innovation, there is cynicism that the targets represent little more than lip service.”
Although the government has set targets for the reduction of red tape the initiative appears to have come too late. The economic outlook is worsening with 92% of SME’s predicting an even gloomier outlook for the next 12 month and almost half saying that the biggest pressure facing them in 2008 is the economic slowdown, with one in three struggling to perform too many job roles. One of the only bright spots in the survey was the widely held belief amongst those surveyed that technology can help in mitigating against the problem. But what are responses are feasible.
Clive Lewis, the ICAEW’s (Institute of Chartered Accountants in England and Wales) Head of SME Issues is unequivocal in recommending that small businesses concentrate on cash management. “Put cashflow and financing on the agenda for every management meeting, regularly update cashflow forecasts and if there is a conflict between profitability and cashflow take the cashflow option”, he says.
However, not everyone is convinced that the credit crunch is bad news. Mark Thompson, Managing Director of UK business management and information systems provider, COA Solutions, says, “Interestingly, some organisations see challenges in the economy as an opportunity from which they can profit. To realise this opportunity requires effective financial management, maximising competitive advantage and a readiness to make quick decisions. In fact, after polling 100 senior financial directors and controllers, we found that 75% believed their organisations will prosper during the downturn, which demonstrates greater confidence than one might expect.”
Thompson adds, “Investing in the right business systems is also key to ensuring SMEs not only survive but prosper during these times. Organisations need to be able to access accurate and timely information about their financial condition and more importantly adopt tools that assist in modelling and planning future activity. Without a solid understanding of where the organisation is at, how it is coping and crucially where it is headed; managers can only guess at the measures required to navigate through the credit crunch. This leaves too much to chance and invites disaster, with SMEs being the most vulnerable.”
Cash management is one area where business systems can definitely make a contribution starting with a simple review of customer and supplier terms to make sure that customers are compelled or incentivized (through the use of cash discounts) to make payment early and that the business takes full advantage of any supplier credit lines available – which are usually much cheaper than bank facilities.
Automation ensures that supplier payments are only made when strictly due and debtors are chased from the moment the debt becomes payable.
McCallum advises businesses to get close to their bankers. “Cash flow is vital during a downturn and bankers can offer alternative sources of asset backed finance that may be better than an overdraft”.
Cash flow forecasting in SME systems can be surprisingly difficult and is often ceded to off-line spreadsheets even though the underlying information is usually freely available within an accounts database. For example, amounts receivable should easily be projected from sales quotes, sales orders and invoices outstanding and amounts payable should be similarly simple to derive. However, many SME systems appear incapable of generating a forecast automatically – a position that could seriously impair decision making in a downturn.
Systems can also be used to accelerate the “Quote to Cash” cycle, by enabling the rapid production and delivery by email of sales quotes, sales orders and invoices. The Pegasus backed research emphasizes the need to “delight customers” since it is commonly believed that it is between 3.5 and 4 times more expensive to attract new customers than it is to keep an existing one. The challenge for SME’s is the need to balance efforts to attract new business against the time needed to understand clients' changing requirements and their view of the products and services that they receive. “While new business is the lifeblood of any company, customer intimacy is of equal importance”, says Pegasus.
Pegasus’ Kevin McCallum suggests, “As well as keeping a careful eye on money coming in and out of the business, SMEs need to understand where they are making unnecessary investments. Can costs be cut on stationery, catering, entertaining or travel? Can recruitment or office moves be deferred? Can the supply chain be made more efficient (in line with lean manufacturing principles)? While some costs, such as wages, interest payments, rent and rates are fixed and cannot be reduced, there is usually a huge amount of slack in the business that can be curtailed.”
“FDs can no longer afford the luxury of time to make important decisions. And for important decisions to be made quickly, accurate, real-time information is critical. Running off lengthy reports and sifting through page after page to locate the relevant information is simply unfeasible in today's SME – particularly when there are tools available which can swiftly provide this information in the appropriate format at the touch of a button,” he adds.
The credit crunch will be catastrophic for cash-starved businesses but for those that are well run and supported by adequate systems, the credit crunch will simply present a stern test of business mettle and business model. “I have a general sense based on my travels around the UK that things are not as bad as the media would have us believe. I have seen manufacturers predicting 300% growth and even recruiters experiencing strong demand for senior personnel as Boards of Management cut out the ‘dead wood’ and look for fresh talent”, comments McCallum.
“For many businesses there is value in the data that they simply don’t know about. Accurate financial information, careful credit checking, cost reduction, customer intimacy, innovation and process improvement are all ways to make sure that businesses are in the best shape possible for the challenges that lie ahead,” he adds.
