A recent report by the House of Commons library shows the extent to which Britain remains a nation of small businesses. According to figures released earlier this year, of the 5.98 million businesses in the UK, 5.97 million have less than 250 employees and 5.7 million less than 10.

A nation of shopkeepers

These businesses are particularly impacted by downturns in the economy - mainly because they rely on a small number of customers or a particular niche to survive and thrive. The economic wreckage caused by the COVID-19 crisis will likely be most acutely felt at this end of the economy. 

The UK Treasury was praised for its fast and comprehensive response to the COVID-19 pandemic, including VAT deferrals, bounce back loans and the furlough scheme. However, the second half of this year provides a unique set of challenges for small businesses that have taken advantage of this support.

As the furlough scheme draws to a close, directors will need to make decisions about bringing back employees at the same time as loan repayments might begin and with a good deal of uncertainty about how quickly and effectively the economy will grow.

The importance of accurate and up-to-date financial information

At the best of times, making informed business decisions relies on access to accurate financial data - and the second half of 2021 is unlikely to be the best of times for small businesses. 

Research by the UK’s SME Recovery Tracker (which is jointly run by Corporate Finance Network (CFN) and Association of Chartered Certified Accountants (ACCA)) shows that as many as 65 percent of small businesses do not have a business plan. By their nature, these companies will not have finance directors or HR departments and will often rely on the advice of third-party accountants and financial advisors to provide them with information to make the right decisions.

Getting access to this information can be difficult. A typical small business may have to provide their accountants with quarterly bank statements if they are VAT registered (less than half of UK small businesses are). Otherwise, an accountant may only see financial information from a small business on an annual basis - not the most effective way to keep on top things in volatile times. 

Even businesses that do regular monthly or quarterly management accounts find the process of sharing banking information complex. Ultimately many businesses rely on either photocopied bank statements, which need to be digitised, or sharing CSV files, which can be less than secure.

Introducing Open Banking

Open Banking, which came into force in the UK in 2018, has enabled consumers to access more transparent and effective financial planning. Open Banking enables apps and services to understand patterns of financial behaviour more clearly - such as spending and cash flow - to provide access to more relevant financial services. A consumer, for example, might authorise an app to analyse their spending habits to see if there is a bank account that would better suit their financial needs.

While there has been less focus on Open Banking for business, its impact is potentially far more significant for businesses than consumers - particularly for the millions of small and micro businesses in the UK.  Open Banking enables businesses to quickly and simply authorise apps to access and share specific and relevant financial information.

The impact of Open Banking on small businesses

Consider an accountant typically interacting with a business. The accountant likely sends an email to the client asking for banking information, but the company director is busy and needs reminding several times to provide the information. When it does come it may be missing critical information or in a format (for example photocopied statements) which is difficult to analyse. This is not the director’s fault - as they have a day job to do. Nor is it the accountants. But it is less than optimal in terms of access to timely information.

Open Banking enables a more frictionless approach.  The accountant can use a third-party app to request bank statement information from a client and within two or three clicks this request has been authorised and the director has provided specific access to the information requested - and nothing else. All of this can be achieved from a mobile phone screen via one email.

This process saves time and effort, but perhaps the most important and impactful consequence is the ability for accountants to provide small businesses with timely business advice, based on up-to-date information. Very few accountants would disagree with Sir Richard Branson’s quote: “Never take your eyes off the cash flow because it’s the lifeblood of business.” But if you are unable to access that information until it is too late, the damage could already be done.

A more effective exit from the pandemic

As the nation’s small and micro businesses begin to emerge from the dark days of 2020 and 2021, they will need access to accurate financial information and advice more than ever. As any entrepreneur knows, revenues and costs never grow in sync and this is made more complicated for many businesses by the post COVID-19 impact of deferred tax payments, onboarding staff again or predicting the pace at which the economy will bounce back. 

Accountants have a critical role to play, helping smaller businesses to survive and thrive but also providing an honest assessment of the businesses that are unsustainable. This, however, relies significantly on accurate and, most importantly, up-to-date financial information. Open Banking provides the ability to deliver this in a neat and seamless way.