Overcoming cash flow and invoicing challenges to boost small business productivity

Alex von Schirmeister

Managing Director, UK & Emerging Markets, Xero

Small businesses are the backbone of the UK economy but are lagging significantly in terms of digitalisation and, as a result, productivity.

Small and medium-sized enterprises (SMEs) are the backbone of the UK economy. In 2023, they accounted for 61% of all UK jobs, with the vast majority of companies employing fewer than 250 people. Within this group is huge diversity in size and type of business, and their digital capabilities. However, all too often they are treated as one homogenous group resulting in tech companies and the government often overlooking the specific needs of the smallest businesses.

Cash flow and SME productivity

Cash flow problems, invoicing issues and the resulting hit on productivity are major issues for small firms, many of whom are spending so much time chasing late payments and manually creating invoices that they’re left with little time to grow, innovate and thrive.

“Whenever we talk to small businesses, they tell us their most precious commodity is time and that the biggest challenge they face is managing their cash flow,” says Alex von Schirmeister, UK and Emerging Markets managing director for global small business platform Xero.

“Our data shows that small businesses in the UK are actually less productive now than they were before the pandemic — and we’ve been talking about productivity concerns for much longer than that.”

Digital tools boost efficiency and revenue

Digital tools can mitigate challenges by automating routine tasks, improving communication and enhancing customer engagement. For instance, customer relationship management (CRM) systems can streamline sales processes and improve customer interactions while accounting software can automate financial tracking and reporting, saving time and reducing errors.

The productivity gains from digitalisation can be substantial: automation of repetitive tasks frees up time for employees to focus on more strategic activities. In fact, the UK’s smallest companies (those with nine or less employees) could generate up to £77.3 billion in additional revenue and create 885,000 new jobs if they all digitalised at the rate of the top 20% tech adopters, according to a 2023 study by Xero and consultancy Cebr.

The UK’s smallest companies (those with
nine or less employees) could generate up
to £77.3 billion in additional revenue and
create 885,000 new jobs if they all digitalised

Collective benefits from small business growth

“That would be a massive leg up — and not just for these companies individually,” says Schirmeister. “Small businesses represent a huge proportion of jobs and overall turnover. Even the smallest bump in incremental productivity and growth will have an immediate ripple effect on the national economy.”

Xero’s research found that SMEs that had digitalised the most over the last four years had grown their revenue by 8.1% over the same period compared to the slowest adopters, whose revenues declined by 4.7%.

Digital education and networking

It’s important to remember that small businesses differ in size, industry and their ability to adopt new technologies. Some may lack digital literacy, face financial constraints or operate in less digitalised industries.

“Companies don’t always know where to turn to and don’t always get support from wider networks or the Government in terms of education,” says Schirmeister. “It’s likely that someone else has faced the same challenge and discovered the right tool, so it’s important that small firms network and learn from each other. The Government can also do a lot more to level up education and offer more tailored support to help speed up digitalisation among the smallest businesses.”

Government support for SME digitalisation

The UK Government should also prioritise tackling late payments to small businesses, which Xero refers to as ‘unapproved debt’. “It’s almost like these companies have taken an unapproved risk-free loan,” says Schirmeister. “It’s positive to see late payments pledges in many of the manifestos, but we need to see more firm action from government to hold these companies, particularly if they’re PLCs, to account in the same way they do on equal pay.”

Adopting digital tools, like automating invoice reminders, boosts productivity and contributes significantly to economic growth. Policymakers and industry leaders must support these efforts by making digital education accessible and offering financial assistance and resources. This will enable businesses, regardless of their starting point, to benefit from digitalisation.