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DIGITAL ACCOUNTING

FOR BUSINESSES

02 | WELCOME 03 | PLUGGING THE PRODUCTIVITY GAP 04 | MAKING TAX DIGITAL 05 | AN ACCOUNTANT’S ACCOUNT 09 | POOR PAYMENT PRACTICES 11 | INFOGRAPHIC

AUGUST 2018


DIGITAL ACCOUNTING FOR BUSINESSES

WELCOME A

ccounting has undergone a significant shift over the past several years. While traditionally seen as a grey, complex task that can result in a glazedover expression for even the savviest of business owners, it has to be said that times are changing significantly for management of company finances. The first step to evolve the pace of business operations is to solve the UK’s productivity crisis, something that’s going to be paramount in order for the UK to “become the best of all major economies” in the next 12 years, with business secretary Greg Clark leading the charge. And then there’s the government’s introduction of Making Tax Digital. This will be absolutely essential in order for business owners across the nation to take their accounting processes into the future. It will see that taxes go beyond paper with management using the internet and the web in order to speed up processes, making them more efficient and effectively supporting the effort to increase the nation’s productivity. Financial secretary Mel Stride admitted Making Tax Digital has meant that “many have been

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worried about the scope and pace of reforms”. It’s understandable – change can of course be a daunting prospect when things have been done one way for so long and that’s why Elite Business sat down to speak with the Peter Czapp, co-founder of The Wow Company, an accountancy firm. He gave heartfelt, honest and open insights on his experiences with digitising accounting and, in his words: “Why be the last person to adopt?” After all, you wouldn’t write invoices on a typewriter, would you? Elsewhere, a key issue British businesses face in terms of managing their finances is the serious matter of late payments. Not only is it impacting the company purse, it’s affecting the wellbeing of business owners too, neither of which is acceptable. Interestingly, SMEs in Singapore were among the highest concentration of companies using software to enhance productivity, so perhaps UK firms can take note. Rounding all of our insights off nicely, we’ve crunched the numbers surrounding all things productivity, tax and accounting, making it clear just how much potential lays ahead for the future of finance.

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PLUGGING THE PRODUCTIVITY GAP The UK’s productivity woes have been discussed for years now and still the issue continues, so what help is there for SMEs to charge up their operations?

BACK IN SUMMER 2015 a Fixing the Foundations productivity plan was championed by Sajid Javid, the then-secretary of state for business. He proposed a number of measures to sharpen up enterprise efficiencies including businesses making long-term investment to help Britain “become the best of all the major economies by 2030”. After apparently heading back to the drawing board, a renewed focus on increasing productivity came out of Westminster in November 2017 as part of a socalled Industrial Strategy helmed by Greg Clark, the business secretary. The ambition was to boost the economy, tackle productivity and enhance employee earning power by embracing change brought on by technological developments. Despite these plans, there is still much work to be done. The Office for National Statistics (ONS) reported figures in May 2018 to reveal productivity over the first quarter of the year fell 0.5% compared to a 0.7% increase in the fourth quarter of 2017. Commenting on the results, Tony Danker, chief executive of Be the Business, the organisation dedicated to plugging the productivity gap, said: “This decrease in productivity should be a wake-up call for all of us. The strong productivity figures at the end of 2017 were more the result of a temporary dip in hours worked, and less about real increases in output.” The Industrial Strategy’s plan to embrace technology is a step in the right direction and late May 2018 saw the government revisit this notion with a plan to review how companies are implementing such innovations.

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The report into productivity barriers is expected to help UK companies “unlock £100 billion of untapped benefit to our economy”. Commenting on the agenda, Clark said: “Now our modern Industrial Strategy is ensuring that firms across the UK can take advantage of leading technologies and management practices.” With such a focus on boosting productivity from the government as well as other organisations, it would seem that there’s no denying the power technology can have on a business looking to increase its efficiency.

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DIGITAL ACCOUNTING FOR BUSINESSES

MAKING TAX DIGITAL Making Tax Digital will arrive before we know it. But what exactly is the purpose of the new government accounting process? AS WE’VE DETAILED, the government is on a quest to enhance the productivity within UK businesses across the country. And a key part of its plan to supercharge efficiency of companies and take them into the future is the introduction of Making Tax Digital. Quite literally, implementation will mean that business owners, selfemployed people, sole traders and landlords can keep records of their taxes using digital platforms, such as software and apps. But in summer 2017 the roll-out was deferred to give companies more time to prepare, following many voicing concerns about adapting in such a short space of time. A pilot of Making Tax Digital is now live but

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businesses with a turnover above the VAT threshold will have until 2019 to provide digitised VAT records, as per the revised schedule. Other companies won’t need to keep digital records until at least 2020. Commenting on the launch postponement at the time, Mel Stride, financial secretary to the treasury and paymaster general, said: “Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms. “We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses.” Making Tax Digital promises

businesses will find the process of managing their tax returns much easier with the modernised approach, rather than the traditional and often stressful method involving SME owners being buried below stacks of paperwork. Indeed, HMRC has so much faith in the roll-out that its goal is “to become one of the most digitally advanced tax administrations in the world.” The aim is to eliminate an £8bn tax gap that currently exists due to “avoidable errors”. A survey of 2,900 small businesses and landlords published by HMRC in November 2017 assessed where they stood on digital accounting. It turns out those using software were outnumbered by those opting for paper records and spreadsheets, with landlords the least prominent group using digital for numbercrunching. The primary explanation for this was down to a “lack of need” or “because they lacked confidence with technology”. The research also revealed that 68% of respondents claimed they were comfortable with using technology to manage finances and 5% of software users said they weren’t entirely at ease with doing so. However, there is plenty of scope for companies to embrace Making Tax Digital relatively seamlessly once they’re up to speed – 96% of those surveyed have web access, 95% have a computer, laptop or tablet and 95% browse the internet daily. Among concerns for a successful transition though are cybersecurity and web speeds, respondents declared.

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AN ACCOUNTANT’S ACCOUNT The transition to manage accounting with digital tools, such as software, apps and the internet, can seem daunting at first. But, having been an option for over a decade now, it’s nothing to fear and will unlock a world of opportunity, one business owner explains. IN A CONVERSATION with Peter Czapp, co-founder of The Wow Company, a 14-year-old accountancy firm, he described how the business has been using software to meet the needs of clients for ten years. The company’s mission when launching was, in the words of Czapp, “to make a difference to small businesses”. Little did he know, a difference would soon be made to his own business. “We wanted to make it easy for people to build beautiful businesses and for the first four to five years of the journey there was lots we did to help businesses do that,” he said, detailing the foundation of Wow. “Imagine your mission in life is to help, then suddenly Xero comes along and makes the relationship between you and the accountant so easy. Our eyes were wide open and we were so excited.” Czapp’s introduction to the future came from an Australian client, who fired up their MacBook to log onto the Xero website, which he called “ground-breaking”. Giving more clarity, he recalled: “Accountancy a decade ago was the thing you found on the old PC in a corner that someone came along once a week to do. You were petrified of it and had to hire a bookkeeper who

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handed information to the accountant at the end of the year. Accessing a site showing us Xero we were like ‘oh my God’, it’s everything we could hope and dream of.” The Wow team quickly set out trials with clients, which grew from three to ten to 20 quite quickly, to now when using Xero is standard practice. “It gave us the entire confidence to say

as part of your mission, we’ve found the perfect tool to help you and it’s going to make your life so much easier,” said Czapp. “We were always innovative but suddenly the tool changed client relationships and abilities and made their lives a billion times easier. And I remember the exact moment it changed our lives and the lives of the client. Since then we’ve been on a journey of discovery.” Back then, persuasion would have been a technique needed to effectively sell Xero but that changed as use of the platform is necessary to work with Wow. “If you don’t want to use Xero you can’t be a client,” said Czapp. “If you think it’s a good idea to operate on old-fashioned software we can’t do our job properly. Our view of the world is about implementing technology and making lives easier. It’s now a matter of ‘how are you using Xero?’ from ‘you should use Xero’. People come to us because that’s the way we think and they subscribe to that

Accountancy a decade ago was the thing you found on the old PC in a corner that someone came along once a week to do

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TOP TIPS FOR MAKING TAX DIGITAL MTD for VAT is due to commence for VAT periods starting on or after 1 April 2019. So all businesses will need to comply with the new process from this date onwards. 1. Make sure your software can submit VAT online, if not look for a cloud first accounting provider 2. Don’t leave it to the last minute 3. Avoid expensive migration or version update costs on older software Xero offers free data migration from older desktop software providers (Up to 24 months of your accounts) so you can keep your backdated data

view. I honestly forget there are businesses out there operating on paper. Vintage isn’t cool, it’s stopping you joining this world where you can be slick and efficient.” Czapp insisted that while Making Tax Digital may sound like some governmental compliance jargon, it’s really not the case as it has the potential for “supercharging your business”. In addition to that, finances will seem like less of a struggle in the future as they’ll be viewed in a different light. “Making Tax Digital is not some chore to do grudgingly, it’s something to embrace to change your lives,” he opined. “It’s changed our clients’ lives. Why wait till the deadline?” Serving a broad range of small businesses with anything from eight to 80 members of staff, Wow’s goal is to make accounting hassle-free, offering advice on bookkeeping, payroll, tax and so on. Explaining what clients’ typical ambitions are, he detailed: “They want to grow, hire more staff, generate profit – they’re looking to build a legacy. We’ve been doing this a long time. We know what success looks like.” The key thing for Czapp and his team today is that they’re not selling Xero. They’ll show would-be business partners what it is but they’re not using the car salesman approach. Interestingly, he said that everyone has moved across following the demo but a lot of people simply hadn’t made the switch to digital because they weren’t aware of it. “They weren’t fearful, they jus didn’t know it existed,” Czapp said. “We

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sat down with them for a demo and suddenly they wanted it. It didn’t matter what was in the way, convincing people in the business or running conversions, they knew it was a challenge worth going through because the promised land on screen sat with us was worth going on a journey for. We just said ‘let me show you, tell me how you do this currently, here’s how you can do this.’ I’ve not done one in ten years where someone has said, ‘you know what, I’m happy with this shoebox of receipts’.” Revealing that the best approach for someone considering making the move to digital accounting is to get a first-hand demo, as he did and now does for clients, Czapp emphasised that this should be done with an open mind. “Check it out for yourself, go and get a demo of Xero,” he said. “Don’t play with it, get an expert to show you – it will shortcut your journey for how it all works. You might thrash around in the deep end a bit, so find an accountant that uses Xero – there are hundreds across the UK – and then make your mind up. Not many people write letters on typewriters now and there’s a good reason for that. It’s inefficient. And using paper to do your accounts is inefficient. And in a few years nobody will be doing it. There’s absolutely no benefit. Xero’s been around for a decade, it’s not some new-fangled technology. We have close to ten years of benefits using it. Why be the last person to adopt?”

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WHY ONLINE ACCOUNTING WITH XERO IS GOOD FOR BUSINESS Xero’s online accounting software is designed to make small business easier. See how we can help you take control of the numbers, so you can get back to what you do best.

Get your books done faster Xero can automatically handle tasks that used to take up all of your time. From importing bank transactions to sending invoice reminders, we’ll do the work for you. Feel confident in your numbers With all your data stored safely and in one place, it’s easy to get a snapshot of how your business is tracking. You can also invite your accountant or bookkeeper into Xero so they’ll ensure you meet all your tax obligations. Add more to your software Look after your staff with Xero Payroll and drive profitability on your projects with Xero Projects. It’s fully integrated with Xero so you can keep all your business information in one handy place. Do business from anywhere, on any device It’s easy to access all your data and Xero tools from anywhere – just connect to the internet. Plus, keep all your essentials like invoicing and payroll at your fingertips with Xero’s mobile app.

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FUTURE-PROOFING RETAIL

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POOR PAYMENT PRACTICES The culture of late payments in the UK is driving businesses to bankruptcy and leaving leaders with mental health issues THE UK PROBLEM of late payments isn’t new – it’s been happening for years and driving SMEs to bankruptcy. However, the collapse of Carillion, the construction company, in early 2018 shone a spotlight on big companies putting financial pressure on small companies in the supply chain. Needless to say, delayed cashflow not only proves to be detrimental to SME owners but at worst puts them out of business. What does this mean for entrepreneurs? Getting up to speed on where the law can help would be a good first step. The frequent payment tardiness continues due to many companies being uninformed about their rights to be paid on time. In spite of being a small business, owners can hold the big ones to account by enforcing an interest that’s legally-binding. This just might save them from an early stoppage. Offering insight, Rob Straathof, CEO at Liberis, an SME finance provider, detailed: “Businesses are severely hamstrung by irregular cashflows so owners should make themselves familiar with legal avenues to help them recuperate the money they are owed.” Even though the UK government has statutory laws to tackle the problem where public sector organisations can be charged an

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interest of 8% if they fail to pay bills, there hasn’t been much change. And then there are some smaller businesses that avoid suing the bigger ones owing them payment. According to a Federation of Small Businesses study, going to court was the least popular option for resolving conflicts, so legislation may not be answer. Research done by Liberis found that 72% of SMEs spend up to three days a month chasing invoices and it becomes clear that smaller businesses are frequently surviving on slim profit margins, with a limited amount of time to invest in company growth. But time and money aren’t the sole losses – the problem of late payments is causing business owners mental health issues too. Research commissioned by the Prompt Payment Directory (PPD), a payment rating website for businesses, shows that this issue had worsened since 2017 and the ratio of businesses on the threshold of liquidation is up 23%.

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DIGITAL ACCOUNTING FOR BUSINESSES

Commenting on this development, Hugh Gage, managing director of PPD, said: “Business owners need to arm themselves against some of the most common late payment issues and fight back against these poor practices as it’s always best to try and avoid them from the outset by using due diligence through credit reference agencies.” Consequentially, 52% of business owners admitted to have struggled with extreme anger, depression and suicidal tendencies and they blamed the reason on the dearth of cashflow. And one in five have even struggled to pay their mortgage or rent, which will only exacerbate matters. This research is even after the

Prompt Payment Code was created by the Chartered Institute of Credit Management on behalf of the department for business, energy and industrial strategy back in 2008. With an agenda to set the standard for payment processes, it calls on SMEs and big businesses alike to sign on the dotted line and ensure unfair treatment of small companies and supply chain bullying are stamped out. Will being proactive solve the problem and urge bigger businesses to adhere to the rules or is there a need for the government to step in and make stricter 30-day payment policies? Xero’s Small Business Insights Index, which analyses data from 250,000 SMEs, has provided insights into FTSE

Offer simple payment methods & use invoice automation to get paid faster The easier it is for your customers to pay, the more likely they are to pay you on time. Ensure your invoices have payment options enabled such as Paypal, GoCardless, Stripe or World Pay, as well as automated invoice reminders.

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average number of days for a UK small business invoice to be paid (30-day term) - based on Xero Small Business Insights

350 payment habits. It analysed the different sectors causing maximum delays, which saw food producers top the chart with an average of 60 days before payment of invoices. It’s fair to say this problem of delayed payments along with Brexit negotiations ongoing against the backdrop of global economic uncertainty has caused the economy to fall back. Paul Christensen, CEO of Previse, a fintech firm specialising in AI-based payment processes, believes the conversation needs to be about the gap between the supplier delivering a service and receiving payment. He said: “These long payment terms put huge strain on small suppliers’ cashflow and they are often not in a strong enough position to negotiate terms which work for their business.” Christensen’s business has a particular focus on ensuring invoices are paid instantly using algorithms and data points, which reinforces the concept of technology supporting business processes – particularly where accounting is concerned. Indeed, many companies still request payment via cheque, PPD found, giving the chance for excuses such as “your cheque is in the post” to be used. Xero found that 87% of SMEs in Singapore use software for business productivity, one of the highest rates globally, which is why it expects more incentives to roll out elsewhere this year. If the usage of technology makes its way into the accounting process in such a commonplace fashion, it stands to reason that Britain’s small companies suffering from the late payment practices may well turn around the fortunes of the SME economy.

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39% OF BUSINESSES HAVE NOT YET IMPLEMENTED A PAPERLESS POLICY

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£1.9tn COMBINED TURNOVER OF SMALL BUSINESSES IN 2017

£100bn

£1.3bn

BOOST TO THE ECONOMY WITH GOVERNMENT’S INDUSTRIAL STRATEGY AND BUSINESS PRODUCTIVITY REVIEW

AMOUNT THE GOVERNMENT PLANNED TO INVEST TO MAKE HMRC DIGITALLY ADVANCED

£8bn THE VALUE OF THE TAX GAP, WHICH IS DOWN TO AVOIDABLE ACCOUNTING ERRORS (HMRC)

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EIGHT IS THE AVERAGE AMOUNT OF HOURS EMPLOYEES AT ACCOUNTANCY FIRMS SPEND STUDYING BUSINESS APPS

51.8%

BILLION ACCOUNT RECOMMENDATIONS XERO HAS PROVIDED SUBSCRIBERS THROUGH MACHINE LEARNING

OF UK SMALL BUSINESSES WERE CASH FLOW POSITIVE IN MARCH 2018

44% OF LARGE FIRMS PURPOSEFULLY PAY SUPPLIERS LATE TO SAVE THEIR OWN CASHFLOW

72%

OF SMES WOULD STILL USE AN ACCOUNTANT EVEN IF THEY HAD AI AUTOMATING THEIR FINANCES

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AVERAGE NUMBER OF DAYS FOR A SMALL BUSINESS TO RECEIVE PAYMENT FROM 30-DAY TERM

Source: gov.uk, Bottomline Technologies, WorkMobile, MMR Research Associates, Xero: Small Business Insights

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HOW BUSINESSES ARE BENEFITING FROM USING XERO SMEs are behind 60% of UK GDP, but who’s behind small business? Get to know the people driving Britain’s economy and the passions, purpose and tools that drive them. Far from faceless corporations, small businesses are defined by the people who founded, nurtured and worked their way to success. So we got up close and personal and asked these entrepreneurs to tell their stories – revealing the personalities, experiences and motivations behind Britain’s small businesses.

Steven from Future Kings Meet Steven, the creative mind behind Future Kings – one of London’s fastestgrowing creative agencies. He believes good design is good for business, so he puts his team to work for brands to help them grow. He says: “I want to make the world a better place through great design.” I love the simplicity of Xero’s dashboard and being able to see exactly where we are instantly.

Ade from Nubian Skin This is Ade, founder of Nubian Skin – a small business that makes lingerie and hosiery for skin of all tones. Ade wants her fashion business to make a material difference: “It’s really important to me that people know they matter, their skin tone matters and that they are represented.” Xero has made a really big difference in helping me keep my finances organised. It makes my life easier by making it very easy to get invoices out to customers.

Laura from Popcorn Shed Laura is the Kernel-in-Chief of Popcorn Shed – a fast-growing small business that makes great-tasting snacks. Laura loves running her own company, and following in the footsteps of her entrepreneurial father: “I always wanted to nurture something from the very beginning and watch it grow.” Xero has given me more freedom,” says Laura. “I can be out and about and see where we are financially which is really important for a small business like us.

Digital accounting for businesses  
Digital accounting for businesses