Archives For SMEs

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By Sarah Hathaway, head of ACCA UK

Membership of the European Union has been an issue the accountancy profession has made little noise about and it’s viewed as a political issue. However, EU membership is an economic matter which is why here at ACCA we feel an obligation to take a view on membership.

The Deputy Prime Minister Nick Clegg MP described leaving the EU as “economic suicide.” He is right. But why do we care? Because accountants, perhaps now more than ever as we emerge from a global recession, have an important role to play in the recovery, future growth and in guarding against future risk to the UK’s economy.

Accountants traditionally look at the numbers, and they paint a convincing picture of why the UK should not back out of the EU. However, the profession is seeing its role and remit broadening into a much more strategic, forward-looking role in business and from that perspective too, giving up on the economic European Union would be bad news for UK plc.

ACCA sees staying in Europe as a no-brainer, and we aren’t alone. Nissan’s chief operating officer Toshiyuki Shiga has pointed to the major benefits for foreign investors in the UK being part of the EU. As Nissan owns the biggest car factory in Sunderland, employing 6,100 people, and is supported by UK supply chains that employ even more, Shiga’s comments should not be ignored.

Leaving the EU is also bad for the smaller businesses further down the supply chain. SMEs would actually benefit greatly from an even more integrated European Union. SMEs could increase export trade by 45 per cent if the remaining barriers in the Union are lifted.

But this issue isn’t just about trade. It’s about people.

Chief finance officers tell us that overseas experience will be a vital skill for tomorrow’s finance leaders. That sentiment fits with ACCA’s qualification – an exportable asset. You can study it in the UK and take the qualification to the Czech Republic or other markets (and vice-versa). In the EU, that mobility is made easier by free movement of people laws.

The UK benefits from being able to access talent from across Europe – employees bring with them market knowledge and close links with clients, customers and other stakeholders. This cultural connection is vital in a global business world.

The EU is also a vehicle for social mobility. ACCA is guilty of repeating the same messages around social mobility, but can you blame us? Since our infancy in 1904, social mobility has been the central principle of our qualification. Who you are and where you come from is no obstacle to the ACCA Qualification. That social mobility principle also applies in the EU.

Social mobility can include upward progression across Europe in finance and beyond, as well as within the UK? Cutting that continental option off and confining social mobility to within the UK’s shores is strangling that upward mobility.

This isn’t just about the current workforce either. Opportunities for Britain’s younger generation won’t be there if major employers have to leave the UK. Where will they get work – Europe? That won’t be so easy if the UK throws in the towel with the Union.

And if jobs and social mobility aren’t concerns for some, perhaps the numbers – more familiar territory for the accountancy profession – can paint a more convincing picture as to why a UK out of Europe is a bleak place.

The EU is the largest economy in world, worth £11 trillion, ahead of the US (£10.3 trillion) and China (£5.4 trillion). Nearly 34 per cent of world trade originates in Europe, worth around £3.5 trillion annually. The EU is also the top trading partner for 80 countries.

UK companies benefit by £500m a year, while 50 per cent of foreign direct investment to the UK comes from other EU member states. Over 40 per cent of UK exports go to the EU and they are tariff-free. More than 300,000 UK companies operate in the EU.

The EU-US trade deal is expected to generate €80bn (£67.7bn) worth of benefits for the EU and create 2m jobs. The EU-South Korea Free Trade Agreement saves EU exporters £1.35bn annually in tariffs.

Amidst the emotional scaremongering about the EU’s threat to British culture, the figures paint a clear picture that big business, overseas investors, small business and UK employment stand to lose if we drop out of the EU.

It’s difficult to ignore the arguments for staying in Europe. The consequences of leaving will hit the UK hard.

This first featured in City AM, October 2013

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By Nicola Horlick, CEO of Money&Co

SMEs are increasingly going online for something they are not getting from the banks: finance.

Online crowdfunding platforms, which allow businesses to pitch directly to investors, are emerging as a smarter way for SMEs to get the finance they need. Lenders looking for a better rate of interest are ready to compete to fund the most credit-worthy ideas. This means that businesses are more likely to succeed in getting a loan via a crowdfunding platform – and at a more favourable rate.

It’s no wonder that many SMEs are putting their faith in the crowd. Although small and medium enterprises account for 99.9% of all private sector businesses in the UK and 48.1% of private sector turnover, many businesses are struggling to access finance.

Lending to SMEs has been falling since the financial crisis. Bank of England statistics show that lending has been down approximately 3% each month compared to 2012. As banks struggle to do enough to finance UK SMEs, many have found an alternative source of finance in crowdfunding.

While banks are failing to serve an important segment of the UK economy, the crowdfunding market is burgeoning. In three years, the peer-to-peer crowdfunding market has trebled and it could be worth over £1 billion by 2016.  The sector could eventually account for £12.3 billion worth of business loans per year, according to a study by innovation charity Nesta. Clearly peer-to-peer and person-to business lending – the model on which Money&Co’s is based – has the potential to significantly boost the UK economy.

Next year, the appeal of crowdfunding will only increase. In April, the FCA will begin to regulate crowdfunding businesses, providing protections to both lenders and borrowers. Under the key proposals for loan-based crowdfunding platforms, platforms will have to ensure among other things that they talk clearly and accurately about the potential risks and rewards. The regulator will also keep a close eye on the kind of back-up plans the platforms have in place to ensure lenders are protected.

Crowdfunding can provide lenders and borrowers with more control, as well as acting to undermine the restrictive dominance of high street banks. As the economy begins to grow again, crowdfunding can inject further confidence in growth with the necessary funding.

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By John Davies, head of technical, ACCA

It has always been the case that the first step for any entrepreneur wanting to set up in business is to work out what structure would be most appropriate for their business.

For many people, the choice of business form will seem fairly straightforward. If you want to protect your privacy and retain complete control of your business, and are prepared to be financially responsible for its debts, you will probably choose to operate as a sole trader or with trusted colleagues in a partnership. If on the other hand you value the protection of limited liability status you will opt to become a limited company. These two fundamental forms have each existed for well over a century and remain hugely popular.

But it is no longer true to say that the choice of form available to new entrepreneurs is quite as black and white as the above would suggest.

Recent years have in fact seen a significant expansion of the diversity of business forms available to new and existing businesses. Here are a few examples of this movement:

  • The limited liability partnership (LLP) was introduced in 2000. The LLP is a hybrid form, half-way between a partnership and a company. It has the hallmarks of the traditional partnership in that its partners are free to arrange the firm’s internal affairs more or less as they see fit, but it resembles a company in that it is a corporate body and is required to prepare and publish annual accounts. The LLP is available to any type of business but is especially attractive to professional firms that wish to take advantage of protection from personal liability for their individual members.
  • The community interest company (CIC) is a company structure which is expressly intended to be appropriate for enterprises with social or community benefit in mind, rather than purely for the financial advantage of its proprietors. To achieve this the format requires profits made by the company to be ‘locked in’ so as to be channelled towards furthering its corporate aims.
  • Public service mutuals are a new vehicle designed to deliver functions hitherto delivered solely by the public sector. The UK Government is actively encouraging the take up of mutuals as a means of cutting central government costs and has raised the prospect of 1 million public sector workers being transferred to mutual by 2015.

A new report by Tomorrow’s Company, contributed to by ACCA, reviews the new landscape of UK business forms and urges entrepreneurs, advisers and governments to consider the opportunities that are afforded by this expansion of choice.

What choice means is that, for the entrepreneur, it need no longer be a straight choice between partnership and company – depending on the motives of the person starting up the business, one can now contemplate becoming a social enterprise or a charitable incorporated organisation as well as a sole trader and a company limited by shares or guarantee.

From the perspective of government, the report argues that more attention needs to be paid to business form when considering its dealings with private sector businesses and the issuing of contracts to them. It poses the question of whether companies with overtly commercial business and funding models are the right sort of entity to be delivering public services, referring, as an example, to the recent case history of care homes being taken over by listed companies which have aggressive funding models.

And for advisers, such as practising accountants, it means that there is a much wider range of information that they can provide to clients wishing either to set up in business from scratch or to review their existing structure or form.

What this all means is that businesspeople today have more options as regards the structure of their firm and more freedom to organise the way they organise their business so as to align it with the expectations of their consumers and stakeholders. The report makes for interesting reading by any one who has ever felt constrained by the choices available to them.

 

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By Mark Gold, chair of the Global Forum for SMEs, ACCA

Despite representing more than 90 per cent of global businesses, and accounting on average for 50 per cent of gross domestic product and 63 per cent of employment, SMEs have by and large been marginalised in the debate about sustainable business – both in terms of policy and practice. ACCA Global Forum for SMEs  has published a new policy paper  that looks at why this is the case and how we can change that. We know that SMEs have been slow to adopt environment-related improvements with only 29 per cent of SMEs in the EU thought have introduced measures to save energy or raw materials, compared with 46 per cent of large enterprises (see here).

The picture is likely to vary across Europe but as an average, the potential for improvements are certainly there, as well as the resulting benefits. So why are SMEs still thought to be slow in terms of recognising the importance and benefits of sustainable business practice?

One aspect is certainly that all too often we end up talking about SMEs as one homogeneous group, which is usually unhelpful. If you consider that this includes businesses with zero employees (only the owner manager) and those that have up to 250 employees, it becomes clear how vastly different these entities are. Their levels of formability, internal capacity and specialisms, not to mention motivations can mean that they end up in fact having very little in common when it comes to sustainability. But all too often we have sought to engage them without appropriately recognising how diverse and disparate this segment or the business population is.

The second question is: are we able to capture all the activities that SMEs do in this area appropriately? Are we asking the right questions? If we ask a business owner what their CSR strategy or sustainability practice is they may draw a blank face. They won’t think to tell us about the local charity they are supporting, about providing young people with work experience nor will they think about the cost savings they are seeking to make in their energy consumption as relevant answers. So are we capturing all the ‘business as usual’ activities that they are already doing?

Finally, are we giving them the right tools to communicate these and to engage? We talk about sustainability reporting, assurance, environmental management systems not to mention all the ‘jargon’ that has developed over time in the sustainability field. It is no secret that much of this has been developed with large businesses in mind so it is therefore no wonder that we are not seeing many enough SMEs engaging.

What I know from my own practice that specialises in creative industries and deals with thousands of SMEs each year is that these are responsible businesses, with a positive impact on society and a careful approach to environment. We ought to be able to capture this better.

By James Bonner, independent sustainability consultant

It is not surprising that the majority of initiatives devised to incorporate environmental and social issues into business processes, and indeed pressure to adopt such programmes, are predominately aimed at large corporations and multinationals. Such sizeable organisations clearly have significant impacts on the environment and wider society, and furthermore are motivated to protect their brand and reputation, which can be at risk if such issues are neglected.

However, it is important to consider that social and environmental impacts are interconnected, complex and cumulative, and the effects they have, whether positive or negative, are a result of how society and the natural environment are treated as a whole/and by everyone (consider the feedback loop of natural capital in the blogpost ‘Natural capital as a material issue’). As such, the impacts of all of society, and furthermore all types of commerce – from individual traders to the largest multinationals – impact and affect social and environmental issues, to some extent, through their activities.

The European Commission state that ‘SMEs [Small and Medium Enterprises] are the backbone of the European economy and their contribution is essential for pursuing the EU goals towards sustainable growth’. However, the Commission goes onto discuss that while SMEs have a significant environmental impact (responsible for 64% of pollution in Europe) they find it more difficult to comply with environmental legislation than large companies. Such a viewpoint is echoed in a number of other studies (including from an Australian paper which agrees that ‘SMEs lag behind their larger counterparts in terms of environmental activeness and performance, and therefore require assistance to improve this area of their business operations’).

Additionally, while not implying that large organisations have become ‘sustainable’, or cannot do much to reduce their impacts, it is fair to say that a number of large companies have progressively undertaken steps and measures to improve their social and environmental performance (from CSR reporting to stakeholder engagement, partnerships to environmental management systems). It could be argued that there are ‘diminishing returns’ from focusing on such bodies – that while continued pressure and improvements to their business operations will reduce their sustainability impacts, more effective and sweeping benefits could be achieved by targeting smaller business entities that do much less to tackle such issues.

Furthermore, as they are increasingly required/expected to disclose their wider sustainability impacts, the significant environmental and social impacts of large multinationals are not necessarily a result of their own operations or activities, but hidden in their supply chains. Whether unsustainable environmental activities of suppliers of raw materials (e.g. in electronics manufacturing) or the unethical labour practices of production which is outsourced (e.g. in retail and clothing) – the really damaging environmental and social impacts can be from the small and medium companies which perform these activities for them as part of their wider supply chain, but do not garner the same attention/scrutiny as the large multinationals themselves.

With a changing global economic landscape, and a focus on stimulating new growth and economic development in many national economies, there is potentially an opportunity to engage with SMEs and entrepreneurs who are attempting to start out to set in place business models and processes which incorporate and integrate social and environmental considerations from the outset.  By informing/providing guidance on the benefits of considering such sustainability issues (reduced costs, enhanced reputation, new markets), and the potential costs of ignoring them (legislation, taxes, loss of customers), SMEs can be, like their larger counterparts, encouraged to manage their environmental and social impacts.

This blog post intends to primarily support ACCA’s Accounting for the future session ‘Practical Workshop: methods for SMEs to consider- environmental and social issues’ on Tuesday the 9th of October by discussing the social and environmental impact of SMEs- issues that, along with initiatives available that are focused on SMEs, will be discussed in greater detail in the session.