How SMEs are automating to overcome adversity
Executive Summary
UK SMEs are operating in incredibly testing times. While the UK has so far avoided a recession in 2023, economic data collectively points to a challenging outlook for British businesses. This is particularly the case for SMEs, which are having to navigate an unforgiving climate with fewer resources than their larger counterparts. This means it has become a greater struggle for SMEs to invest, hire or retain top talent, and even get affordable loans from banks and lenders.
SMEs are automating to survive and discover competitive advantage. Due to their size, SMEs should logically be nimbler than their larger counterparts. But this is not a given, and many small businesses are held back by inefficient internal systems. To grow, SMEs must be efficient organisations. Innovative use of technology is allowing SMEs to automate manual processes and streamline their operations.
SMEs risk failure if they do not adapt Unfortunately, the UK’s economic challenges are likely to persist for the foreseeable future. The Bank of England has increased interest rates to bring down inflation, but it is proving difficult to achieve this quickly. With no clear end to these challenging conditions in sight, waiting for the situation to normalise is not an option – SMEs must adapt to survive.
Automation is transforming how SMEs process invoices. Invoicing has long been a vital part of running an SME. Invoicing processes are supposed to ensure cash flow remains healthy, but they are often disrupted by administrative issues. Many SMEs still have manual invoicing processes that are often inefficient, subject to human error and, ultimately, have a negative impact on cash flow. Technology is now providing businesses with control over their administrative functions, and therefore their finances.
Part 1: The perfect storm for SMEs
UK businesses are enduring an unforgiving economic environment, especially SMEs. Going into 2022, CPI inflation had been below 5% since 1992. This quickly changed following a string of deleterious global and domestic events – inflation surged upward to reach a peak of 9.2% at the end of 2022.1 High inflation created a cost-of-living crisis and, with essentials costing more, consumers were left with less to spend elsewhere while businesses faced higher costs.
The Bank of England’s response to inflation, hiking interest rates, has exacerbated the issue. Unfortunately, it has so far only been partially successful in combatting inflation while businesses of all sizes are being hit hard by higher interest rates. This not only impacts SMEs’ ability to access new finance; it also impacts businesses that have existing loans that were taken out to survive the pandemic lockdowns.
According to the Centre for Economics and Business Research (CEBR), over 6,700 British businesses became insolvent during the second quarter of 2023.2 This was more than double the number recorded during a ‘typical’ quarter during the pandemic.
While the Bank of England kept the base rate constant at 5.25% in September, rates may go even higher in subsequent months.
The Federation of Small Businesses (FSB) regularly gauges sentiment among small UK businesses, which it publishes in a quarterly index. Despite promising signs of recovery earlier in 2023, the most recent index paints a pessimistic picture. In the second quarter, it contracted with 41% of businesses recording a decrease in revenues and over half rating affordability and availability of new credit as poor.
Many SMEs also need to deal with another issue – internal inefficiency. Getting a business up and running takes a huge amount of hard work and – in a bid to open and earn revenue – SMEs can develop bad operating habits. ‘Making do’ becomes the default. Manual processes dominate. Bottlenecks soon form.
The data around this is stark. Most SMEs rely on manual processes for business-critical customer communications. And, on average, employees spend a third of their week on document-related tasks and more than half of that time on disseminating information.
It is clear that change is needed. Faced with consumers less likely to spend, and against a backdrop of expensive finance and rising operating costs, small business CFOs and finance directors are under great pressure to make the numbers work. This is why so many are now looking to make internal improvements. Of those business owners applying for credit, revealed they had been offered interest rates of 11% or higher.
Part 2: How SMEs are taking control
Innovation is often necessary within SMEs. Without the scale and financial resources of larger companies, SMEs require their leaders to actively tackle problems and think creatively to find solutions. Finance departments are now also under extra pressure to help the wider company navigate the challenging business environment.
One clear option can be to reduce costs through selling assets, reining back investment plans and/or reducing headcount. But finance directors will be wary about compromising their business’ core strengths as well as harming the company’s culture. Instead, this has led to business leaders exploring the role automation could play.
As manual processes are prone to delay and human error, automating them can be transformative for SMEs. This can not only deliver real financial savings but also generate greater operational efficiency and free up valuable resources throughout an organisation.
Over the past three years, seven in 10 SMEs have introduced innovative changes with these businesses reporting a 14.8% increase in revenues as Technology is at the core of this, allowing SMEs to automate their processes and pass on both time and money savings to other parts of their businesses.
The automation secret appears to be out, leading to a new wave of UK SMEs tech innovation. Those that fail to automate not only risk missing out on greater efficiency and more margin flexibility – they are in danger of not surviving at all.
One prime area for innovation is SME’s financial processes. Most CFOs and finance directors are fully aware of the pain of late payments, which have become endemic among UK SMEs. It is a huge problem with over half of small businesses reporting late payments in 20225, which has knock-on effects throughout an entire business, impacting cash flow and forcing many to apply for credit.
The severity of these late payments vary, but up to 30% of SMEs are owed as much as £45,000 at any one time. This can be a devastating shortfall for SMEs that operate without the cash buffer of larger companies. It can put them in a Catch-22 situation. Operating with such outstanding debts may not be a viable option; pursuing late payments takes up even more time and resources.
While late payments are mostly caused by external issues, SMEs can influence their internal processes and maximise efficiency across internal finance departments. If an SME’s CFO or finance director ensures their own department’s processes are as well run as possible, it can help reduce inefficiency and the chance of lost revenue.
Simply put, many SMEs can’t afford to not automate.
“To move our society from low or no economic growth, we need to see more businesses free and empowered to experiment and try new ways of working, as well as a more ambitious pathway for start-ups to shake up the market and change the world.” - Tina McKenzie, FSB Policy and Advocacy Chair, FSB Tech Tonic Report.
Part 3: The role of e-invoicing
From a CFO’s or finance director’s perspective, invoices should be issued and paid as soon as possible with no lag time anywhere in the process. This lag time can create real costs.
Automation of invoicing is the solution. Otherwise known as e-invoicing, it entails the use of innovative technology to create, transmit, receive, process and store invoices electronically.
Using an e-invoicing solution, an SME’s finance department has its entire invoice process in one place. Instead of being scattered between different files and even pieces of paper, e-invoicing solutions keep an SME’s entire invoice database in one secure location. E-invoices are created in a structured data format and designed to support stronger processes, operating without disruptions (i.e. printing and scanning).
E-INVOICES VS PDFS
Contrary to widespread belief, e-invoicing does not simply mean emailing invoices as PDFs. Although PDF is an electronic format, it cannot contain structured data and documents are purely visual representations of billing information. Moreover, a manual transfer is still required – users must download a PDF invoice and upload it to accounting software before integrating it into their system. In contrast, e-invoices are created in a structured data format with fully interactive capabilities – giving users the ability to amend as required. They are automatically created and benefit from a fully electronic process.
E-invoicing facilitates the move away from manual data entry, which is prone to human error and inefficiency. It involves e-invoices being transmitted securely and electronically, with improved tracking and traceability through a seamless, digital process. This drastically reduces delays and accelerates how SMEs convert their work into cash in their bank accounts. It also frees up finance departments’ time from repetitive administrative processes, allowing personnel to instead focus their time and effort where they can add more value.
There are also clear risk management benefits. Should disputes arise, or SMEs are required to answer inquiries from regulators, the ability to present evidence via an e-invoicing solution not only quickly brings together all required information but showcases a professional and high-quality approach. In addition, with e-invoicing becoming more popular around the world, the international standardisation of financial processes can help UK SMEs with overseas aspirations.
Part 4 Case Studies: SMEs reaping the benefits of automation
STEER AUTOMOTIVE GROUP – ACCIDENT REPAIR PROVIDER
After achieving significant growth over a short period of time, Steer’s back-office processes were unsustainable and left the company vulnerable to an increased amount of human error and potential fraud. Processes were heavily paper-based and relied upon manual data entry and filing, with the workflow dependent on emailing, printing and signing physical invoices. With Quadient AP, Steer Automotive was able to revolutionise these processes with digital tools. Entire systems were brought online into one secure and easily navigated hub, which then allowed the finance team to develop custom workflow and approval processes. Manual data entry was all but eliminated and this fast-growing business obtained the efficiency it needed to continue expanding.
Andrei Visu, Financial Integration Specialist, Steer Automative Group: “[Now] there’s not nearly as much manual input. The system automates a lot of the data from invoices, so we don’t need to have someone to do that, which reduces the errors we saw before with the more manual processes.”
ST . PAUL’S CATHEDRAL – HISTORIC RELIGIOUS SITE AND HERITAGE ATTRACTION
The world-famous St. Paul’s Cathedral attracts millions of visitors from around the world every year, with this traffic putting a huge amount of pressure on the operations of this organisation. With 25 different departments (including finance, IT, HR, music, food etc) there are numerous budgets to coordinate and many payments to process each and every day. This complexity inevitably led to delays throughout the organisation and often meant slow payments, with the accounts payable team struggling to keep up. With Quadient AP, St. Paul’s Cathedral was able to fully automate these workflows. Invoices were corralled into a central location, instantly streamlining operations and giving consistency to how all invoices were processed. Now, the organisation is able to function with greater simplicity and line-of-sight for employees overseeing payment requests. Payments have been sped up, with better efficiency, and this has helped St. Paul’s Cathedral to become a better, more accountable organisation.
“Because the organization is quite complex, the automated solution had to tick a certain number of boxes and only Quadient AP could do all the things we needed. “I can’t imagine going back to the way it was before.” - Daniel Graham, Financial Controller, St. Paul’s Cathedral
Part 5: Conclusion
The economic headwinds may be real, but UK SMEs are operating in an exciting time. The automation revolution is allowing these companies to rediscover their competitive edges and hold their own against their larger peers. Technology that allows businesses to automate means real efficiency can be attained, with undeniable time and money savings that – for some businesses – could be the difference between breaking even and expanding.
Automation is transforming how SMEs work. Those that do not automate, risk not surviving an economic environment that has become even less forgiving for smaller businesses. The statistics around the risks of standing still are undeniable. Manual processes no longer make sense in 2023 and any professional finance department must cut these out, eliminating delays and administrative burdens.
As shown, automation is more than simply speeding up manual processes. It allows a business to free up resources and time, redistributing this across the wider business where they are better used. Security can also be tightened with automation, with human error eliminated and professional standards heightened in general.
Much of this depends on having the right software tools to support this automation, and the solutions built with CFOs and finance directors in mind – designed to help not hinder – will be the ones that make the difference. UK SMEs are still challenged, but with automation, they are not disadvantaged. Instead, they are catching up.
