How Open Banking will give you greater clarity over cash

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Half of SMEs collapse because they run out of money. New regulations give entrepreneurs a better understanding of their cash position, says Simon Lyons

When it comes to banking, cash flow is a strange beast. You need to supply your bank with a cash flow forecast when three occasions arise: when you are starting out with a business, when you need lending, or when you are in desperate trouble and the bank wants to track your spending to cover its potential losses.

Fifty percent of businesses fail in the first five years, and in some areas of the UK that number reaches 80 per cent. As a rule, the common denominator is that they run out of cash and, when you investigate the numbers, it is quite staggering. As of yet, no technological innovation has managed to bring down this failure rate but that is about to change.

The importance of cash flow management

The sad thing about this is that cash flow management is probably one of the most important elements of running a business, which makes you wonder why do more businesses not have better cash flow management.

Well, it’s cumbersome, needs constant updating, you have to be brutally honest with yourself and, if done properly, it makes you take some very hard decisions. There is a phrase called “pay your mates last” — this phrase is not referring to actual friends, but to suppliers which you have a good relationship with. A cash flow will determine a lot of the behaviours and decisions from within a business.

Keeping cash separate

Cash flow has always been a separate task to accountancy, bookkeeping, reconciliation, really any of the financial tasks associated with a business. Nobody has managed to find a way to aggregate the data that is required without a lot of manual effort, cost and complexity. Consequentially businesses have no fallback or infrastructure, meaning no insight into what their cash position looks like today or what it will look like in the future. This means that many critical financial decisions are being based on guesswork and businesses run on mantras such as “it will be okay” or “something will come up” rather than sound financial planning. It’s no coincidence that the lenders that offer rates in excess of 15 per cent have very quick turnarounds on decisions. When SMEs approach them it’s because they have run out of cash, are desperate, and the lenders know it.

The future is Open Banking

So, what’s the answer? Well two things.

First, the business owner must be able to have a simple, easy view of their financial health in one place. Cash flow begins at the bank, so that’s a good place to start.

Second, businesses must be able to look ahead and preempt any problems on the horizon. This puts them in control of their cash position; where problems exist, they can react quickly and find solutions such as rescheduling payments or raising funding to solve an impending cash crisis. Being on the front foot when it comes to cash management will help small business stay in business as well as helping business owners sleep better, safe in the knowledge that they are making informed financial decisions.

This ability to see your current and future cash position sounds great in theory but how do we make it happen? Traditionally, the challenge has been always aggregating data from within the business, the accounting system and the bank. There has been a brick wall between these data sources, making it difficult to gain a real-time view of your cash position. But earlier this year the Open Banking regulations landed and changed this.

Open Banking means that SMEs can now allow fintech businesses to extract their data from banks and accountancy packages (like Xero) and aggregate this to deliver new insights. This means a new age of intelligent services that help SME owners understand the past, present and future of their cash position and use this insight to make better financial decisions and stay in business.

Simon Lyons is chief commercial officer of Slide, a banking app for SMEs which includes cash flow based on future transactions