How accountants can improve financial planning and results through Open Banking to help SMEs

Richard McCall, CEO of Armalytix, explains why Britain’s army of small businesses face a challenging road navigating the hurdles of tax deferrals, loans, and uncertain growth. Richard argues Open Banking is an invaluable tool that businesses and their professional advisors should use to get fast access to up-to-date financial information that helps maximise the upside of the recovery.

The House of Commons library recently reported that, of the 5.98 million businesses in the UK, 5.97 million have less than 250 employees and 5.7 million have less than 10. This indicates the extent to which Britain remains a nation of small businesses.

Shopkeepers and café owners

Smaller businesses such as shopkeepers, independent café owners and hairdressers are especially affected by downturns in the economy because they rely on a building a loyal customer base for return business. Additionally, the aftereffects of COVID-19 have been acutely felt at this end of the economy with many businesses collapsing due to the economic wreckage caused by several national lockdowns, that have forced the closure of these kind of business.

These impacts have been mitigated in part by the swift actions of The UK Treasury in offering loans, VAT deferrals and the furlough scheme to keep these businesses alive.  However, this means these businesses are now faced with a complex set of challenges as government funding and financial support is coming to an end. With the furlough scheme also ending in October 2021, company directors need to consider how to bring back employees and manage loan repayments that are likely to begin shortly.

How accurate and timely financial information helps SMEs

The starting point for making any informed businesses decision must involve access to financial information; you simply cannot run a successful business without the numbers.

As many as 65 percent of small businesses do not have a business plan according to research by the UK’s SME Recovery Tracker (which is jointly run by Corporate Finance Network (CFN) and Association of Chartered Certified Accountants (ACCA)).  These companies are unlikely to have finance directors or HR departments and will rely on sound advice from accountants and financial advisors to provide them with information to make the right decisions.

Richard McCall

Less than half of UK small businesses are VAT registered, meaning an accountant may only see their financial information on an annual basis, and even those that are VAT registered may only need to provide their accountants with quarterly bank statements. This in turn gives the accountant a lot of data to retrieve and analyse at once – some of which will be three months old.  Given these volatile times, this only adds to the problem businesses face making the right decisions in uncertainty.

Even businesses that perform regular financial checks find sharing banking information more complex than it needs to be. The reality is that many businesses rely on either photocopied bank statements, which need to be digitised, or sharing CSV files, which can be less than secure.

How can Open Banking help?

Open Banking has been helping businesses and consumers access clearer and more effective financial planning since the service came into play in 2018.

Open Banking platforms allow apps and services to analyse and understand financial behaviour more transparently.  Open Banking can then be used to provide access to relevant financial services, such as tracking spending and cash flow. For example, consumers may give an app permission to analyse their spending habits which can then advise on which bank accounts are the right ones for them.

Open Banking for business enables small businesses around the country to authorise apps to access and share specific and relevant financial information.  Doing so should be as simple as accessing a banking app from a smartphone.

The power of Open Banking for small businesses

Typically, accountants are faced with a host of problems when collecting financial data from clients. Company directors are usually busy working to tight schedules, meaning accountants may not receive their bank statements at the first time of asking. Even when the documents are provided swiftly, they may be missing vital information such as incorrect dates or unclear formatting. Trying to analyse financial data from a blurry photocopy after chasing the information for weeks is hardly an efficient way of working for accountants.

Open Banking can cut hours off this process. Using a third-party app, an accountant can request bank statement information from a client which can be authorised within two or three clicks. Within this time, the client has provided specific access to the information requested and nothing more. This can all be achieved from a mobile device via one email.

Open Banking makes business easier to manage for both the client and their accountant, but perhaps the most valuable outcome is the ability for accountants to provide small businesses with quick business advice, based on accurate and up-to-date information. It is hard to disagree with Peter Drucker’s statement “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most”. If your insights to cash flow are limited and irregular, you run the risk of causing irreversible damage to the business.

Maximising recovery from the pandemic

As Britain’s army of small businesses navigate the road to recovery from the strains and struggles of the past 16 months, they need access to accurate financial information and advice to help maximise their recovery. Revenues and costs rarely grow in sync.  The post COVID landscape is complicated by a potential increase in revenues being offset by the impact of deferred tax payments or bringing back staff from furlough.  Small business owners, many of whom have experienced the ultimate “stop/start” year, need to focus on maximising the opportunities open to them and working in a COVID safe way, rather than panicking about bank statements or other financial information.  Yet ironically the accountants (the people best placed to help them navigate the financial future) need swift access to up to date information to be able to support businesses to bounce back stronger.  Open Banking is one of the ways in which small businesses and their professional advisors can make the process of gathering information simpler and more effective.