Over the past two years, small businesses have experienced a more challenging operating environment than anyone could have predicted. While COVID-19 has been the unwanted centre of attention, the impact of Brexit, supply chain disruption, rising energy prices and a war for talent have created an uncertain and testing market.

As a result, small businesses – the backbone of our economy – are being held back from realising their potential. But in the tough-as-nails role of the SME owner, you typically either win or you learn. Looking back at the last year can yield fresh optimism for the year ahead. Most notable for small businesses is that technology, and the benefits it can drive, is more accessible than ever.

Although they have traditionally been slower to adopt emerging technologies than larger counterparts, the COVID-19 crisis has supercharged digital expenditure among small businesses, with a 20% increase in the UK following a period of prolonged stability. This looks set to continue and will define many of the trends impacting small firms this year.

New customer behaviours continue to drive ecommerce

While online shopping was already booming, plenty more consumers have realised they can shop from home safely and more conveniently – COVID-19 or not.

In many ways, it can be more efficient for small businesses to operate online. With no need to worry about overhead costs – and no requirement to maintain a bricks and mortar location – the ecommerce opportunity has levelled the playing field for those without the capital to invest in a physical premises.

To capitalise on this, it’s key for small businesses to work with ecommerce platforms that can support online growth. SMEs might also consider looking for tools and software that can help to save time on admin by reducing the manual data entry and paperwork associated with reconciling and interpreting sales information, online or otherwise, giving them an up-to-date view of their finances, cash flow and business performance.

A new era for payments

In addition, small businesses should expect more payment options to become available this year. Cashless payments are already taking precedence thanks to the pandemic, while contactless cards, digital wallets and even tapping your watch to pay for goods are all bringing new levels of convenience that customers have grown to love.

This has an impact on small business suppliers. As they reduce use of cash by embracing tap-and-go payments, they benefit from quicker reconciliation and reduced theft risk, as well as lower storage, transportation and security costs. Essentially, it’s the best of both worlds and should become a priority for small firms if it isn’t already.

When choosing which payment types to offer, small businesses must ensure that they continue catering to their entire customer base, while staying up to date with the latest developments.

A growing need for workforce management

Three-quarters of UK workers say that work-life balance is more important than it was before the pandemic. Flexibility is increasingly a basic expectation of employees, and as demonstrated by ‘The Great Resignation’, many are willing to resign from their roles if they don’t get it.

In the ongoing war for talent, small businesses have no choice but to respond if they want to hire and retain the skills they need. That’s why remote vacancies have already increased by roughly 20% since 2020. But there's still a long way to go. To adapt to this, small businesses are having to place more onus on flexible working arrangements – whether hiring or retaining staff. This increased desire for flexibility is also contributing to a boom in freelancing.

However, working with contractors can create more paperwork and legislation. This further boosts the need for small businesses to forensically plan the evolution of their workforces and to have access to tools that can more accurately calculate wages, which are often their biggest expense.

Making sustainability a priority

While small businesses are battling many challenges, they still have a responsibility to contribute to the fight against climate change, but cost and awareness can hold them back.

Calculating a business’s carbon footprint – often the first step in tackling its impact on the environment – can be a granular, laborious process. So, while many small businesses are looking to make a tangible impact, they are craving more support, particularly given the perception that sustainability initiatives can be complicated and expensive.

Thankfully there are apps and digital tools that make it easier for small firms to go green. Not only is it vital for the environment, but it will be key for maintaining loyal customers who increasingly prioritise doing business with sustainable companies.

Preparing for new legislation

Digitalisation offers a raft of benefits for small businesses, not least enabling them to operate more efficiently. However, this isn’t the only reason to embrace it. In areas like taxation and financial compliance, it is government mandated. Now, VAT-registered businesses with taxable turnover under £85,000 should be preparing for HMRC’s legislation, Making Tax Digital (MTD), which comes into force from April 2022.

It mandates that businesses submitting VAT via the HMRC portal or through the mail will have to shift to maintaining records digitally and filing VAT returns through MTD-compatible software. It might sound daunting, but the transition to digital tax returns doesn’t have to be. Instead, businesses can use it as an opportunity to accelerate wider digital transformation this year, driving efficiency to make customers happier.

Are you ready for a digital-first year?

Many small businesses remain uncertain about adopting technology – however, research has found that firms with the lowest IT expenditure saw their sales fall by as much as £33,600 between 2019 and 2020. That’s compared to only a £1200 drop for those in the top spending quartile. So, in light of the digital trends accelerating in 2022, it will be a vital ingredient for small businesses to thrive in the months and years to come.

So much technological change can be intimidating but responding to it doesn’t mean totally overhauling a hard-built small business. Owners and entrepreneurs should focus on making small, incremental changes – choosing digital tools that make life easier for them.

The ultimate goal is to put digital at the heart of the business to help it run as efficiently as possible – something that will take time, but will absolutely be worth it.

Damon Anderson is Director of Operations UK & EMEA, Xero