What the UK Government defines as micro and small business communities (less than £440,000 turnover and ten or fewer employees) constitute approximately 60 per cent of all companies registered at Companies House, plus there are the tens of thousands of sole traders and partnerships in Britain. So, it is no surprise – and indeed it is good news – that the Government is looking at how it can help small businesses play their part in steering the nation away from an economic abyss.

What the UK Government defines as micro and small business communities (less than £440,000 turnover and 10 or fewer employees) constitute approximately 60 per cent of all companies registered at Companies House, plus there are the tens of thousands of sole traders and partnerships in Britain. So, it is no surprise – and indeed it is good news – that the Government is looking at how it can help small businesses play their part in steering the nation away from an economic abyss.

An example of this is Simpler Reporting for the Smallest Businesses, a set of outline proposals instigated by the Department for Business Innovation & Skills (BIS) that, if these go ahead, would result in large-scale changes in the way small businesses in the UK are obliged to manage their financial reporting. Areas it looks at include:

  • The question of deregulating financial reporting
  • The potential replacement of the balance sheet with a statement of position
  • Using reporting information to file taxes
  • Annual returns

Concerns

The idea of simplifying the volume and complexity of financial reporting on the face of it may sound appealing. I am sure I can hear some business owners raising a cheer. And sure, some of the ideas set forward do have some merit, but we are not alone in having some concerns about these proposals.
Of course there are reporting and operational issues impeding growth, but we think these issues are qualitative, not quantitative. UK businesses need better reporting, not less. So, the proposals miss the real point, and I believe could be detrimental.
Accountancy profession views

Laurence Moore, Director of Prime Chartered Accountants
“The outline suggestions set out in the document are an over-simplification. For instance, the suggestion of a ‘statement of position’ would not have the information required to reconcile with either a profit & loss account or trading statement, & therefore are of limited use to HMRC, for trading partners and banks to assess risk, or to micro businesses themselves.”

Simon Clark, Partner, Kingston Smith LLP
“The Balance Sheet has always been paramount to a micro-business to gain an understanding of performance, and to put the trading of the business into context. Micro-businesses should, and will, continue to record their transactions in the normal way, but under the proposed regime they would have to convert their underlying records from a traditional accruals basis to a cash basis, which seems an unnecessary, and costly, task.


For instance, by changing the basis on which businesses prepare their accounts could result in misleading information being supplied to customers and trading partners. As UK businesses increasingly operate in an environment where we want to be sure suppliers and customers are solvent, this is a worry.

Also, the proposals would make it even more difficult for banks to use annual reports to assess lending risk. Considering the amount of talk around helping banks to have more confidence in small businesses, this would be an own goal.

The cost of transition should also be taken into consideration for a growing business. They will begin as a micro-business but over time will mature and then have to change their accounting basis – they will have no useable historic information from their time reporting under the proposed simplified method to provide to new trading partners.”

The Institute of Chartered Accountants England & Wales (ICAEW) has also published its views on the BIS’s proposals and I like this particular excerpt, which I think is a pretty good summing up of what’s needed: The ICAEW’s Reporting Faculty has now published its draft response which you can read in full here, but here’s the excerpt which seems to chime with our view that better operational reporting is key.
We believe that the information requirements of management should be the primary driver of business record keeping.


“We believe that the information requirements of management should be the primary driver of business record keeping. In order to effectively run a business, to maximise the return on investment and to ensure that adequate funds become available as required, management need to have an awareness of the amount and timing of outstanding debtors and creditors and of the value of capital tied up in stock.”

It would be wrong of me to say what I think is wrong with the proposals without suggesting a solution. As someone running a technology business I could be accused of bias, but I really do believe that access to accurate and real-time information – regardless of which vendor you get it from – is increasingly important for managing cash flow and improving visibility of the exact financial position of a small business at any one time. Share this information with your accountant and they can help you make more timely, informed decisions that can help prevent problems developing. Present this information to your bank and you may be lucky enough to convince them that you are a safe bet for an extended line of credit.

Of course, all this does need a more collaborative approach. No single party can be held responsible for making it work. That’s why I believe that the Government, accountancy bodies, banks, small business organisations and yes, the technology vendors who have the tools to underpin it all, need to put our heads together and come up with a workable solution. And if we are to help small businesses to lead the charge out of the recession, then we need to think bigger than just simpler reporting.