Small businesses are the backbone of the economy. They employ nearly two thirds of all people in the UK and contribute more than half of private sector revenue.

But many are finding it difficult to reach their full productive potential. Often because they are not able to access the same resources enjoyed by larger businesses.

At Xero, we’ve been helping small businesses track their key performance data since we launched in 2008. Ultimately, we would like to help give these firms the same economies of scale that their larger counterparts enjoy.  

That’s why we launched Small Business Insights, our up-to-date snapshot of the health of the small business economy.  It provides essential data that drives informed operational and commercial decisions.

One of the key priorities for small businesses is how to become more productive. When small businesses are as important as they are to the UK economy, it is no surprise that the issue is the subject of a new review by the UK government. Improving productivity at the individual firm level will have an associated benefit at the national level.

What is the Government Business Productivity Review?

Launched by the Department for Business, Energy, and Industrial Strategy, the business productivity review is to examine the role that “firm level” factors can play in boosting efficiency and growth.  These include digital technologies, leadership and management, and will look at the role of public and private sector support.

The intention here is not to propose a one-size-fits-all solution, but to examine what works in different sectors – and why some businesses are falling short of their productive potential. To this end, the department is calling for all businesses to share their experiences. It is seeking ideas and opportunities for collaboration between government and industry.

At Xero, we’re keen to contribute. Here’s why.

Why the business productivity review matters

Policy-makers, large companies, and commentators need to have better informed discussions – and make better decisions about the small business community.

Small businesses need support.

What we see through the hundreds of thousands of small businesses that use Xero are the practical issues that need to be resolved.

Barriers to grow often break down into three areas: access to capital, a failure to use best practices, and a business skills gap.

We welcome the business productivity review as it will shine a light on these issues and start to draw attention to some of solutions.

Access to capital and productivity

One of the most important limits on small business growth and productivity is access to capital.

Our research shows that of the 50,000 businesses that fail each year due cash flow issues some 65 per cent of these blame access to funding.  Quite often the working capital they need is tied up beyond their reach with late paying customers.

On average, small business invoices with 30-day payment terms are often paid in 40 days. Analysis of the FTSE 350 also found that larger businesses are often more delinquent than average – typically paying 30-day invoices for smaller suppliers in 46 days.

This  is a major issue. Late payments cause cash flow difficulties. Just over half of our small business subscribers were cash flow positive in March 2018. That’s still a substantial minority left out of pocket. It frustrates ambitions and stifles innovation.

Late payments also affect the firm’s financial risk profile. This can have an impact on their ability to borrow from banks, meaning even greater difficulty in accessing funds.

It can be very difficult to maximise productivity when a businesses owners are forced to worry about how they’re going to keep the lights on. Steady cash flow and good access to capital ease pressures, help foster innovation, and ensure SMEs can survive and thrive.

We hope the government’s review addresses how access to capital and cash flow issues limit  productivity and examines what can be done.

The call for evidence closes on the 6th of July. We strongly encourage all small businesses to share their experiences: good, bad, and mixed.

Xero also looks forward to sharing its own insights with the Department for Business, Energy and Industrial Strategy and the Treasury.

When SME productivity is made a priority, the entire UK benefits.