A ‘hidden tax’ on SME’s time: how digital tools could solve this

A report from Starling Bank is urging business owners to get on board with digital financial tools as it claims it could reduce their admin load and save them money. 

The findings suggest that UK SMEs spend an average of £63,000 a year managing their finances, and, with the transition to Making Tax Digital, this could increase as businesses invest in new MTD-compliant software. 

However, Starling argues that rather than escalating costs, moving to digital practices will save businesses time and money, leaving them with more space to innovate. 

The report also argues that transitioning to digital tools will bolster the wider economy, allowing us to catch up with countries like France and Germany. Such a move could result in the generation of £10.4 billion in new tax receipts, giving us the means to significantly bridge the gap with our continental neighbours.  

Almost half of businesses don’t plan to increase digital tool usage

The study presented an overall healthy picture of the use of digital financial tools in the UK, with the survey taking in 1000 business owners and finding that 84% of SMEs already use digital tools for some financial tasks.

The Starling team says that it is microbusinesses that have the most to gain. Sole traders could see a £4.1 to £4.9 billion productivity boost from wider and deeper adoption, which is 20% of the total future benefit. However, businesses with 1-9 employees, could account for double this with £7.0 to £9.4 billion of benefit. 

However, despite the initial positive outlook, the survey also revealed that only around half of those businesses (48% of respondents) are planning on increasing their usage, even as the Government pushes ahead with its digital overhaul. 

While the impact of non-compliance with MTD is an issue in itself, the survey reveals that businesses are losing out in real time if they are wedded to manual processes. “Where digital tools are used for financial tasks, SMEs report an average time saving of 41% over manual processes,” state the researchers.

What is holding SMEs back?

Delving into SME owners’ concerns, the survey found that there are huge misconceptions about digital financial offerings – the most damaging of all being that they are simply too expensive for many ventures to afford. 

Researchers discovered that a large number of SMEs believe digital tax software could cost them nearly £12,000 a year. In reality, this is “fifteen times the price of some high-end solutions”. Not only does this reflect a lack of awareness of digital financial tools’ market offering, but also a more basic absence of understanding around the realities of digital financial management as an industry.

This sentiment is further emphasised by the report’s findings. It revealed that whilst 83% of SMEs and 78% of sole traders are aware of digital tax submissions tools and 77% are aware of digital invoicing tools, the “…depth of such knowledge was inconsistent, with some individuals possessing only a surface-level understanding.”

There is rising concern that a lack of financial literacy is holding some business owners back, something that this survey only serves to support. In October, we reported on data from Xero, which uncovered that more than a third of SME owners were unaware if their business was profitable last month, while 55% admitted that they avoid dealing with finances.

Education and support needed

Starling Bank is using the findings to advocate for the Government to push education to help dismantle preconceptions, and to give SME owners the knowledge and confidence to push ahead with their digital financial transformations. 

It is calling for the creation of a new online ‘Financial Tool Cost Calculator’ within the Government’s Business Growth Service, “to show SMEs the true, lower cost of digital financial tools.”

This would give businesses clear guidance on how much tools will cost them so that they can plan accordingly. In the meantime, some of the biggest providers in key spaces like invoicing have a large range of packages to meet different budgets. 

There are also embedded finance options that cover more aspects of business finance, including account reconciliation and tracking expenses. 

Business owners need to consider exactly what their needs are and then find tools that match. It’s possible that they simply want to digitise common manual tasks, but they may also need software that delivers more. For example, some businesses may benefit from forecasting tools that crunch data to help strategic planning, or inventory tools that help deliver cost savings. 

Starling is by no means alone in calling on business owners to push ahead and get financially savvy. However, the bank is also urging those who have taken the first steps to keep on top of what is on offer to stay ahead of the game.