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plumber at work | accountingweb | Unblocking the red tape for Pete the Plumber

Making the numbers count for small businesses


To give real accounting value to our smallest clients, Kevin Phillips suggests that we should start by thinking about who the numbers are actually for.

2nd Oct 2023
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Meet Pete the plumber. Pete’s business is one of the 5.5m small and medium businesses in the UK, which make up 99% of all UK businesses. These small or medium-sized enterprises (SMEs) also, according to the National Federation of Self-employed and Small Businesses, account for 60% of employment and just over half of total turnover among private businesses. 

Given this, it’s no surprise that SMEs are considered the backbone of the economy in the UK and around the world. Globally SMEs make up 90% of businesses and 50% of employment, says the World Bank. It therefore has a significant impact if SMEs struggle to navigate and overcome challenging economic times. From creating jobs and wealth to driving innovation and boosting local economies, especially outside of major cities, SMEs undoubtedly punch above their weight.

Defining an SME

Of course, a perennial question is just how do you define an SME? Definitions differ from country to country and industry to industry, and typically involve the number of employees, operating revenue or assets. Additionally, some definitions include a micro category, with fewer than 10 employees. 

Whatever definition you prefer, it is clear that the SME segment is far from homogenous. Pete is likely to be a micro business, with very different operations and accounting requirements to a medium business of 250 people. So, as accountants, do we recognise that Pete has specific needs from his accountancy service and are we accommodating that?

Who are the numbers for?

Let’s step back and ask who we prepare accounts for. Accounting standards such as International Financial Reporting Standards (IFRS) are designed to make large, listed companies comparable to investors. And for sure, there are diluted versions of these standards, such as the IFRS for SMEs accounting standards, that aim to reduce the accounting burden on smaller businesses. But these still have an external audience in mind, whether that is Companies House, HMRC or future strategic partners, investors or acquirers. This might make sense to larger SMEs who have more complex business operations, a specific strategic roadmap, and crucially, the accounting resources to produce these numbers (and translate them into something meaningful to support the day-to-day running of the business).

Numbers that count

Now let’s consider Pete the plumber again. Does any of this really matter to him and impact his business day to day? Almost definitely not, so is it any wonder that he probably considers accountancy services as a grudge purchase and a distraction from keeping his business going from month to month?

Can we, as accountants, do better in supporting our clients who are at the smaller, even micro, end of the SME spectrum? Should we be asking ourselves whether we are supplying them with the information they really need to succeed, instead of focusing solely on ticking the boxes that HMRC and Companies House set out?

A focus on producing numbers that only function to keep businesses compliant takes the small business owner out of their business, making them lose income while their time and attention are spent on red tape, whether real or perceived, every month. These red tape tasks are a source of frustration and anxiety for business owners who typically aren’t accountants. And then, to top it all off, all this effort doesn’t even result in data and insights that are meaningful or helpful to their business.

It’s all about the cashflow

For Pete and most other small business owners, useful data looks like an accurate, easily understandable representation of their cashflow every month. Many SMEs succeed or fail on their cashflow. Overspend and jobs and customer service are on the line. Underspend and opportunities for growth might be missed. 

This type of practical, helpful and useful information is what matters to smaller SME owners, rather than abstract accounting concepts, which sometimes even deliver misleading insights. While there is never going to be a requirement to compare these businesses with big, listed companies there is a very pressing requirement to help them to succeed. 

Being a true strategic partner

This doesn’t mean doing less, and in turn, earning less income ourselves. It means using our training, experience and common sense to steer our small business clients through only the very necessary red tape and then using the rest of our time with them working as real partners in their businesses. This could include providing better visibility of actual cashflow, support on managing debtors, reducing payment lead times, and insights into optimising cashflow – all the things we were trained to do. And all the things that will grow Pete’s business, making him a more profitable client in the long run. 

Should we not be asking ourselves, at every turn, whether there might not be a better way to do things, and whether we are adding real value and being a true strategic partner to our SME clients? Asking how we can make Pete’s life easier and his business stronger, and, by so doing, future-proofing our revenue streams. 

To me, that is real accounting excellence to strive for.

Replies (5)

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By Tornado
02nd Oct 2023 16:39

do we recognise that Pete has specific needs from his accountancy service and are we accommodating that?

I find this statement and some others in the article a bit confusing. For me if goes without saying that we always assess the needs of clients and tailor the services to get the best from both of us. Why would it be any other way, or perhaps this is not so obvious to others and possibly the reason why we have such mad ideas as the one-size-fits-all approach of MTD.

I now believe that there is at least one generation the does not understand people and thinks technology is the ONLY answer to everything, which is a great pity when the real needs of the people they serve should be at the forefront of their thoughts, not how THEY can do things quicker for more money.

Thanks (2)
By raybackler
03rd Oct 2023 09:54

I wrote a book last year called "Molehills - Don't Make a Mountain out of your Accounting". It addresses many of the issues in this article. I do agree with Tornado, but I find that the challenge is usually take up by sole trader accountants like myself who do provide more of a part time finance director and mentor role to small business clients.

I also agree with Kevin that the compliance requirements are geared up wrongly for these small business clients. It really is all about the cash flow, making sure they collect money from customers and set the right amounts aside for taxes. They don't need a lot of advice about their business.

Take the plumber example in the above article . They normally have work coming out of their ears so, as long as they set their labour rate correctly and the mark up on materials purchased correctly, they are going to make a profit. If they then blow that profit on reckless private spending then they can't pay their taxes on time.

Also, the article raised a challenge on the content of small business accounts. In my book, for this sector, I have suggested replacing depreciation and deferred tax with capital allowances. It doesn't matter to a small business how a £1000 computer is shown in the accounts, but the average owner glazes over when discussing, why taxable profit isn't the same or close to the profit in the accounts. I have made other suggestions too.

Overall, Kevin has made several good points and there is room for challenging the status quo.

Thanks (3)
By Jdopus
03rd Oct 2023 14:53

I have to say, in my experience of clients like these they are not remotely interested in cash flow either. There is only one figure they are remotely interested in and that's tax payable.
The prime service you should be providing to these clients is tax planning and advice on how to keep compliant with HMRC.

Thanks (0)
Replying to Jdopus:
By raybackler
03rd Oct 2023 16:07

That is the minimum you should be doing, but that means it looks like a mountain from your client's perspective. It is too late if they have bought that new car without your advice on cashflow and then they realise they can't afford it later on. Tax money then spent and facing a capital loss to put it right. They need gentle education to show them the way to sleeping easier at night.

Thanks (0)
Replying to Jdopus:
By Open all hours
04th Oct 2023 08:51

Tax planning which was so much easier with a 30 April year end. MTD has pretty much killed that idea.

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