CREATING WORLD CLASS ACCOUNTANTS

Transcription

1 SME Snapshot 2015

2 2 AIA SME Snapshot 2015 CREATING WORLD CLASS ACCOUNTANTS

3 AIA SME Snapshot Foreword In the early twentieth century, the Association of International Accountants (AIA) was the only international accountancy body founded with the aim of providing a professional qualification encompassing accountants all over the world. AIA delivers a qualification that works on both a national and international scale, and works to secure a definite and recognised professional status for accountants. Today, AIA members uniquely use the designation International Accountant, and the majority of our UK members work in small and medium-sized enterprises (SMEs) or in small and medium-sized practices (SMPs). AIA recognises the importance of small and microbusinesses to the success of the British economy, and the hugely significant role they play. At the beginning of 2014, 99.3% of the 5.2 million private sector businesses were small and 99.9% were small or medium sized. 5.0 million (96%) of those businesses were micro-businesses, employing 0-9 people. Serving the SME sector is important to the AIA, as is the safety of those businesses that rely on AIA members. We believe there is an argument for better safeguarding of the SME sector, the consequences of poor financial and business advice can be disastrous to those that it employs. AIA s specialism in this sector, along with our stringent disciplinary procedures, combine to give both expertise, as well as a safety net on the rare occasion something does go wrong. It is in our national economic interest to help small businesses overcome the challenges they face in starting and growing their businesses. AIA members have extensive experience of working with small and micro-businesses and the unique challenges they face; they are committed to supporting SMEs, and their accountancy and finance knowledge puts them in a prime position to support their development and play a crucial role in their growth. AIA works with our strategic partners and through initiatives like the Business Growth Service, and the BCA Roadshow for Growth, to ensure that our members have the support and resources to both develop their own businesses, and to help their clients in setting-up and growing their businesses. The SME Snapshot forms an essential part of AIA s focus on this sector, and is designed to gauge today s commercial environment for small and micro-businesses. The survey takes a snapshot of our members and wider network s views of the current business climate and key challenges facing SMEs. The results of the survey shape our strategy for policy and public affairs, as well as member services and support. Philip Turnbull, Chief Executive

4 4 AIA SME Snapshot 2015 Business Climate What is the biggest challenge you currently face as an SME? The single biggest challenge identified by SMEs in the survey was maintaining cash flow. SMEs experienced significant problems with late payment and the very nature of being a small or medium sized business meant many felt unable to negotiate more advantageous supplier terms. AIA members have been proactive in government initiatives aimed at supporting this sector, such as the Growth Vouchers scheme, however it would appear that overall it has had little impact as the second biggest challenge identified in the survey was winning new business. 14% Key skills and knowledge gap 37% Maintaining cash flow 2% Negotiating procurement processes 7% Obtaining specialist advice 8% Other 32% Winning new business Further challenges included finding appropriately skilled staff, responding to changes in taxation and other legislation (including EU directives and employment law) and adapting to regulatory changes. The single biggest challenge identified by SMEs in the survey was maintaining cash flow CREATING WORLD CLASS ACCOUNTANTS

5 AIA SME Snapshot What has had the biggest impact on SMEs in the past 12 months? Just under half of those surveyed were yet to feel the effects of economic growth, suggesting that the economic crisis has had a sustained effect on the SME sector. SMEs were also adversely affected by government regulations and specified that red tape has a large impact on their activities. In addition to increased and new regulation, a number of respondents cited specific cases where government departments had been slow to respond to queries which had restricted business opportunity. Only 4% of respondents felt that unaffordable business inflation had the biggest impact on SMEs in the last twelve months and this may be indicative of the low inflation environment present in the UK economy in recent years. 8% Other 41% Red tape 47% The economic downturn 4% Unaffordable business inflation The economic crisis has had a sustained effect on the SME sector

6 6 AIA SME Snapshot 2015 What should the government do to better support the growth of SMEs? As seen in the previous question the reduction of business regulation is the most important action government could take in support of the SME market. Whilst acknowledging that some action has been taken through The Cutting Red Tape programme, it would appear that a complex and disproportionate tax system places restrictions on the SME sector. Similarly, 14% of respondents identified that the SME sector would benefit from a simplification of employment law, which can be particularly onerous and leaves some companies failing to comply. 10% Make access to public sector work easier 2% Other 15% Raise awareness of available help and provide better support 34% Reduce red tape 14% Simplify employment law 25% Simplify the tax system and make it proportionate Although many SMEs do not tender for public sector work there is a significant number who felt that this government should make access to public sector work easier. Whilst the government has committed itself to increasing support for SMEs bidding for government contracts, the respondents felt there was more that could be done to streamline this process. A significant proportion of respondents highlighted that government should make greater efforts to raise awareness of help available to SMEs and to provide better support. CREATING WORLD CLASS ACCOUNTANTS

7 AIA SME Snapshot How do you view the business climate for SMEs in the next 12 months? Are there any indications in your day-to-day business that the recession has come to an end? 43% Improving steadily 32% Increasingly difficult 25% Static economic downturn 48% No 52% Yes There are clear indications from the answers to questions 4 and 5 that there is still some uncertainty with regard to stability in the SME market. A third of respondents expected the business climate to become increasingly difficult over the next twelve months; just under half could see no indication in their day-to-day business that the recession had come to an end. Although just over half of respondents felt that they were experiencing growth in their day-today business, a quarter of those who responded believed that the UK SME sector would remain static over the next twelve months whilst roughly a third were optimistic and believed that the market would improve steadily. These results are a reminder that the UK s key sector of small and medium enterprises remains highly susceptible to fluctuations in the economy and that the recent economic downturn remains highly influential in their business planning. The UK s key sector of small and medium enterprises remains highly susceptible to fluctuations in the economy

8 8 AIA SME Snapshot 2015 What will your business be spending money on in the next 12 months? It is reassuring to see that nearly 40% of businesses plan on investing in market development and that expansion remains a key factor in budget allocation. This perhaps demonstrates growing confidence for SMEs as expanding into new markets can be both high risk and expensive. The results also show that SMEs are prioritising staff training and investment in new technologies over expanding their workforce, however in contrast to AIA s Snapshot Survey 2012 there is a 9% increase in those businesses that expect to increase their staffing levels in the next 12 months. The cost of both day-to-day operations and an increase in the cost of regulation were also highlighted in responses to the survey. 38% Developing new markets 10% Increasing your workforce 3% Other 6% Research and development 14% Staff training 29% Technology Investing in market development and that expansion remains a key factor in budget allocation CREATING WORLD CLASS ACCOUNTANTS

9 AIA SME Snapshot What are the barriers you have encountered when dealing with the law for your SME? AIA works closely with LawBite, an online legal service providing simple law for small companies, who wanted to ask the small businesses surveyed whether they were met with any barriers when dealing with the law for their SME. The highest percentage of those surveyed stated that the expense of legal advice was the biggest barrier, closely followed by unsuitability for small companies. It is clear from the responses to the survey that there is a need to make legal advice more accessible to the SME sector, particularly small and micro businesses. Legal advice for small businesses needs to be made more affordable, as well as simpler to access and understand. Conversely, the legalities in setting up and running a small business need to be simplified. If startups and small companies can get the legal aspects of their business right from the outset, then they will be in stronger position to grow. 29% Too expensive 28% Not suitable for small companies 18% Too difficult to understand 12% Unsure on reliability of advice 7% Too slow 6% Other There is a need to make legal advice more accessible to the SME sector, particularly small and micro businesses Coming out on top is the usual gripe small businesses have about the high expense of seeking legal advice, which makes doing so a barrier to dealing with the law. With the dated structure of law firms- a partnership structure to feed and expensive offices to maintain- it is clear that the prices they charge are not affordable for the typical SME budget. It is unfortunate that this is the case, as the Legal Services Board found in 2013 that significant legal problems affect nearly 40% of the SME market per year. A lot of these problems (often disputes) could have been avoided by dealing with the legal aspects of their business from the outset. Coming in a close second is the overall statement that they are simply not small business friendly, which encompasses other factors such as the time it takes to receive advice, how understandable lawyers are and with this how trusted they can be. There is often an attitude that lawyers act solely for themselves, which is reflected in the high fees and general legalese prose in which they talk and is only understandable by them. Overall, the results demonstrate that the current legal sector is in need of a revamp to use their expertise to better service and protect the SME sector, although with online legal services now taking an active role, there are winds of change. Lizzie Knight, Head of Marketing, LawBite

10 10 AIA SME Snapshot 2015 Access to Funding In your experience, are SMEs still finding it difficult to access funding from banks? If SMEs are experiencing difficulty in obtaining funding from the banks, are they considering alternative methods of raising funds? 14% No 86% Yes 27% No 73% Yes Over the past year, the UK has enjoyed continued economic growth, reflected in the increasing and evolving appetite for finance among smaller businesses. The importance of small business to the success of the UK economy is paramount, and increasingly, small companies expect to grow and will seek finance to help them to do so. It was disappointing to see therefore that 86% of respondents claimed that SMEs are still experiencing difficulty in accessing funding from banks, although this percentage has decreased nearly 10% from the Snapshot taken three years ago. Helping smaller businesses access the finance they need to prosper and grow will make a vital contribution to the UK economy. Traditional bank lending remains the predominant source of finance in the UK, however the recession saw a tightening in credit conditions which disproportionately affected lending to smaller businesses and the recovery in lending to SMEs has been tentative at best. Over 70% of respondents to the Snapshot said that SMEs were considering alternative methods of raising funds. Over 70% of respondents to the Snapshot said that SMEs were considering alternative methods of raising funds CREATING WORLD CLASS ACCOUNTANTS

11 AIA SME Snapshot What alternative methods of raising funds are SMEs looking at? Responses to the survey indicate that small businesses continue to rely heavily on friends and family, and worryingly, credit cards, but it also shows that they are considering many different sources of funding, as well as accessing more than one source. However, it would appear that there is still a need to better educate small businesses about the varied funding options that are available to them, and give them the tools to ensure that they select the right option for them. 14% Credit cards 39% Friends and family 16% Invoice Finance 16% Other 15% Peer-to-peer lending

12 12 AIA SME Snapshot 2015 Have government initiatives had a positive impact on sourcing funding? Since 2012 the government has launched a number of initiatives including the Funding for Lending scheme, Enterprise Finance Guarantee (EFG) and has set up the British Business Bank, with the objective to make finance markets work better for small businesses in the UK at all stages of their development: starting up, scaling up and staying ahead. 75% No 25% Yes Whilst these initiatives have had a positive impact; the Bank of England s Trends in Lending report published in April 2015, stated Gross lending by all UK MFIs to SMEs was higher in 2014 than in recent years. The high percentage (75%) of those surveyed answering No suggests that perhaps while the government initiatives have had a positive impact on the medium-end of the SME sector, perhaps they have had less of an impact on small and micro-businesses. AIA is working with our strategic partners to ensure that our members, and their clients, are fully aware of all of the funding options available to them. Whilst the UK economy is showing signs of growth, this report gets to the core of the problems faced by SMEs. If we re to continue to lead the G7 we need to support SMEs to grow. The key institutional and government focus must be on clearing the way for businesses to access funding, resources and new markets. At the same time it is critical that SME s are made aware that debt driven finance products, such as credit cards, or invoice factoring do not have to be the way forward, falling foul of potentially expensive peer-to-peer lending or putting your personal relationships on the line are not healthy for business growth. Non-recourse, zero debt solutions such as URICA help solve the financial crisis faced by many businesses. Wayne Morris, Network Development Director, URICA CREATING WORLD CLASS ACCOUNTANTS

13 AIA SME Snapshot Exporting With government pressure to increase exports, has this had an impact on the number of SMEs exporting or growing their exports? Similarly to the previous question, the majority of respondents stated that the government s initiatives to encourage SMEs to export have not had an impact, and it is suggested that they are not reaching the small and micro businesses. The recent Memorandum of Understanding between the UK Trade & Investment (UKTI) and Amazon, may go some way to redressing this balance and give more support to small businesses wishing to export. Last year UK businesses collectively exported more than 1 billion of products through Amazon Marketplace, with the number of UK businesses using the platform for exporting up by more than 90%. 74% No 26% Yes UK SMEs currently trail behind the rest of Europe in terms of exports, according to research from UKTI. Of the five million companies in the UK, only one in five currently export compared with one in four in France and one in three in Germany. The agreement signed between Amazon and UKTI will help to encourage and facilitate overseas trade for British businesses through new resources and dedicated programmes that show the simplicity of selling through Amazon s global e-commerce platforms. A new focus on digital businesses and looking at how to help small to mediums size enterprises export via the web opens the doors to export for smaller and micro businesses. The majority of respondents stated that the government s initiatives to encourage SMEs to export have not had an impact

14 14 AIA SME Snapshot 2015 What additional support would assist SMEs to increase their export activity? The most important issue that SMEs believed would help to increase their export activity was protection against non-payment. A sizeable number believed that in-country representation would assist them to increase their export activity and a smaller number highlighted the more technical issue of specific customs requirements training. Conclusions drawn from this Snapshot would suggest that SMEs are comfortable with any language or cultural boundaries when exporting and the smallest percentage of replies related to information on foreign currency exchange. 23% In-country representation 2% Information of foreign currency exchange 5% Language and cultural training 8% Other 46% Protection against non-payment 16% Training on customs requirements A number of respondents raised issues such as government providing tax incentives for SMEs exporting, simplifying VAT with EU countries and cutting red tape to make it easier and less costly to engage in export activity. SMEs face myriad challenges when expanding their business into international markets. Non-payment or late payment is clearly a major concern for companies that need to settle their invoices on time to maintain cash flow and meet overheads. Having in-country representation in the form of agents can assist with this, but where this is not possible, more needs to be done to address these concerns and support SMEs in entering new markets. Understanding customs requirements is clearly an area of concern for a number of SMEs. Local Chambers of Commerce generally provide excellent training and guidance on this. Such services need to be actively promoted to increase awareness and uptake of such support. Currency fluctuations impact an exporter s bottom line, particularly when payment is made in the local currency. With Sterling currently strong against the majority of trading partner currencies, guidance on market trends and trade timing will help SMEs to maximise their gain in the market and protect against the downside. Government could look to engage a panel of foreign exchange brokerages to work with SMEs to assist in understanding the implications of currency fluctuation on business expansion. The key point to take away from this is that support is available for SMEs to assist in expanding into new markets. David Johnson, Director, Halo Financial CREATING WORLD CLASS ACCOUNTANTS

15 AIA SME Snapshot Business Premises Do you own your own premises? What type of contract do you have? 51% No 49% Yes 6% Coworking (e.g. Membership/drop in space) 30% Lease 19% Licence 45% None of the above, I work from home Do you rent space? Since 2010, the number of home businesses in the UK has increased by 500,000. According to the Department for Business, Innovation and Skills, 2.9 million home-based businesses in the UK contribute 300 billion to the economy. The results were broadly equal between those SMEs who rent space and those who own their own premises, although 45% of respondents work from home. 57% No 43% Yes

16 16 AIA SME Snapshot 2015 What proportion of your overheads do you spend on rent and business rates? Is suitable accommodation a factor which affects your strategic business planning? 12% 10-15% 33% 5-10% 39% Less than 5% 16% More than 15% 40% No 60% Yes In the UK at present every business is required to pay rates on business premises such as shops, offices and factories. Business rates are also applicable to some people who run a business from their home who may have to pay business rates on any part of the building which is used solely for business purposes. Finding suitable accommodation is an equally important consideration for respondents to the survey, with two thirds agreeing that suitable accommodation is a factor which affects their strategic business planning. This question takes into consideration aspects such as office space and accessibility as well as long term investment and development plans. The majority of SMEs in the Snapshot Survey allocate fewer than 10% of their overheads to paying business rates; however this does not take into account the turnover or profit of any respondent. Higher business rates restrict the amount of investment a small business can make. CREATING WORLD CLASS ACCOUNTANTS

17 AIA SME Snapshot IT and Connectivity Do you currently use any web or cloud-based services to help run your business, where you pay for the service on a subscription basis? Just over half of respondents use web or cloudbased services to help run their business. With the rise of subscription and cloud-based software services in recent years it would be expected for the percentage of respondents to increase in the near future as software providers begin to offer more software in an online-only format. 1% Don t know 42% No 57% Yes Just over half of respondents use web or cloud-based services to help run their business

18 18 AIA SME Snapshot 2015 If you use cloud accounting software, what has been the biggest impact this has had on your relationship with SMEs? The majority of respondents to the SME Snapshot survey do not currently use cloud accounting software due to the nature of their business. Those accountants who utilise cloud based software found a mixture of benefits to their business and relationship with SMEs. Respondents found that cloud based software made them more efficient when dealing with SMEs and were better informed when making business decisions. In addition, cloud based software resulted in more accurate record keeping and less time spent on paperwork and administration which meant they could spend more time engaging in new business. It would seem that cloud based software makes it easier to deal with smaller clients. 8% Better able to service the smallest of clients 13% Better informed business decisions 49% Don t use cloud accounting software 9% Less time spent on paperwork and admin 5% More accurate record keeping 11% No impact 5% Other Many respondents noted that the use of cloud based software made conducting their business more flexible, however 11% of respondents answered that cloud based software had made no impact to their business. This survey paints a fairly stark picture about the reality faced by UK SMEs. We can see that many of them are struggling to keep their cash flow healthy and face difficulty getting funding from their banks - while the majority feel that the government needs to cut red tape and chance the tax system to help them grow. Although tax simplification and additional government support would be a welcome boost for small business owners, we believe that they also need to harness the use of new technology to help them run their businesses more effectively. Cloud accounting software in particular would enable them to understand and keep on top of their tax liabilities, manage the money going in and out of their business and give them the information they require to make better, informed decisions. What s very gratifying is that, for the first time we can remember seeing, more than 50% of accountants are now using cloud accounting technology with their small business clients - and the benefits of doing so are being well understood. Hopefully we will continue to see that number grow even more in the years ahead. Ed Molyneux, CEO, FreeAgent CREATING WORLD CLASS ACCOUNTANTS

19 AIA SME Snapshot Is high speed broadband essential to your business? Does your current accommodation offer you secure Broadband/WiFi? 14% No 86% Yes 13% No 87% Yes In reflection of the integral part technology and online working plays in the SME sector, 86% of respondents noted that high speed broadband was essential for business. This is unsurprising as many SMEs are increasingly engaging with their clients through voice and video conferencing and submit regulatory requirements online. As Ofcom reported in Broadband services for SMEs: assessment and action plan published 25 June 2015, by 2017, when 95% of all UK premises will have superfast broadband, around 18% of SME premises will still not have access to superfast broadband. Although the SME Snapshot reports that 90% of business premises offered secure broadband, Ofcom research highlighted that there is particular confusion about the speed of broadband services available. For some SMEs, their qualitative research suggested that advertising up to speeds can often create misunderstanding about the speeds that can actually be achieved. Ofcom discovered that one in five SMEs was dissatisfied with their ability to access the speed paid for.

20 20 AIA SME Snapshot 2015 Commentary by Gloria Murray, AIA Council Member Challenges facing the SME sector 37% of respondents cite maintaining cashflow as their biggest challenge. Cashflow is the lifeblood of any business, but it is surprising how few business owners take the preparation of cashflow projections seriously. It s a great way of foreseeing if there s a potential shortfall in the future that you can then plan for. Many business owners struggle to set payment terms and conditions for their customers and continue to do work for customers who don t pay on time (or don t pay at all). This is one of the major causes for poor cashflow. Others are not planning for VAT or HMRC bills. 32% responded that the biggest challenge they currently faced was winning new business. This is an area that concerns many SMEs as they seek to grow. However sometimes this can be to the detriment of keeping existing customers. It s much cheaper to keep existing customers and get them to spend more than to continue to seek new customers. The smallest number of respondents thought that negotiating procurement processes were the biggest challenge they faced as an SME. Most small businesses do not have the resources to go through procurement processes and get beaten down by price so simply do not apply. In our accountancy practice if a new client comes on board and a major part of their sales base is through procurement we encourage them to change their business model. A high proportion of companies feel over-burdened by red tape surrounding the running of a business. Pensions, Real Time Information (RTI), Companies House and VAT are some of the ways government has put pressure on small business who may not have the manpower and resources to deal effectively with these requirements. It is unsurprising that 41% of SMEs would wish to see the government further reducing red tape. The economic situation still continues to impact on SMEs, although there is a feeling that the economic tide is turning. However, even if the economy is beginning to grow, debts and lack of funding will take time to get resolved. In fact, 43% of businesses surveyed feel more positive about the current economic climate and feel that over the next twelve months the situation will begin to improve steadily. What can government do? The tax system has become more complicated rather than easier and the feeling among a quarter of business owners is it should be simplified. In addition, many professional accountants would agree that a simplified tax system would ease the burden on SMEs. According to a House of Commons briefing paper on business statistics published in May % of private sector businesses were micro-businesses (employing 0-9 people) and AIA s survey shows there is insufficient support for SMEs, particularly at the small and micro end of the spectrum. There is much to be done across a wide range of areas to improve communication between government and small business in order to highlight the range of resources and government support available to the sector. Funding It comes as very little surprise that such a high proportion of respondents still find accessing funding from banks to be difficult, no matter what the Government and the banks have to say. The feeling among small business is it s now almost impossible to get banks to lend. Personally, I have seen clients being asked for cashflow projections when it is obvious that the banks have no intention of lending to them. Banks are making small business jump through hoops when they have no intention of lending, creating additional work and uncertainty for SMEs. Consequently, many small business owners are being forced to look elsewhere for alternative funding strategies, and 73% of respondents answered accordingly. The majority of respondents have been seeking funding from both family and friends, which whilst always popular is not without its own risks. Invoice financing remains an unsurprising favourite with some businesses, although for the vast majority of SMEs this is not open to them as their businesses are either too small or simply not suitable. Over the past five years the SME sector has increasingly explored different ways of sourcing funding for investment and this has often included peer-to-peer lending, Angel Investors or even crowdfunding. It is, however, surprising that only 15% of respondents have considered this form of raising capital. CREATING WORLD CLASS ACCOUNTANTS

21 AIA SME Snapshot Encouraging Growth in the SME Sector Serving the SME sector is deeply important to the AIA, as is the safety of those businesses that rely on AIA members. We strongly believe that there is an argument for better safeguarding of the SME business sector, which forms the majority of businesses in the UK. There are 5.2 million SMEs in the UK, representing 99% of all businesses, with a combined turnover of approximately 3,500 billion, and the consequences of poor financial advice are disastrous to those that are employed within them. AIA uses its voice to respond to consultations and make representations that best serve the public interest and are an active voice in the profession. Our role in shaping policy across the profession is to ensure that professional and ethical standards are paramount, and that there is public confidence in the accountancy profession especially in relation to corporate governance and transparency. The results of the SME Snapshot Survey demonstrate that, whilst improvements have been made, there is still much to be done to ensure that growth and productivity are at the heart of the SME sector. Whilst it is encouraging to see growing confidence in the SME economy in the next twelve months, this confidence remains fragile and we would encourage the government to consider the following to support SMEs: 1. Reduce regulatory burden on business by simplifying the tax system and cutting red tape 2. Reform business rates to encourage small business start-up and growth 3. Improve communication with SMEs of government initiatives and advice 4. Encourage bank lending in the SME sector to facilitate investment 5. Consider corporation tax relief for smaller entities 6. Consider exemptions for some aspects of employment law for micro businesses The results of the AIA s SME Snapshot match the findings from our own members. Almost as many businesses find red tape to be an issue and the economic climate, the difference is that while the economic recovery is improving the cost of compliance continues to grow at a rate of 4% a year. Winning sales and a good cash-flow are continual challenges for SMEs, but these are issues that they can resolve themselves with their trusted advisors, but it is the things that are outside their own control which worry SMEs and us most. 73% would like to see the government reduce red tape or simplify health and safety or employment law as a priority and more could be done to support UK companies deal with late payment from overseas clients. Ian Cass, MD of the Forum of Private Business

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