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We are now almost two thirds of the way through 2022 and almost 30 months since that day in March 2020 when Covid hit and the world went into lockdown. Many, quite rightly, look back at those days and attest to this as a tipping point in the life of their business, their staff, their family and not least of all, their clients. But Covid is just one of the challenges we continue to face. 

• Many of those in denial of Climate Change are struggling to come up with any alternative reasoning behind the floods, excessive temperatures, drought that are evidencing themselves this year. As I sit in my home office, I view a 100% brown field with 50 cattle who come out every day and are unable to find any grass to eat. That has never happened before in all the years I have lived next to farmer Richard’s field.

• A number of business owners around where I live have closed their doors forever – the reasons include the dramatic increase in utility bills – the UK appears to be heading for gas increases of over 400%+, lack of footfall – presumably due to online ordering and excessive property taxes.

• Faltering supply chain – many countries report that their business owners are no longer able to order their goods with any certainty of a timely delivery. Just in Time worked yesterday but not today. This has been a major contributor to diminishing consumer confidence.

• War and global unrest – who knows how the Ukraine situation will end? How important is this besieged country? Answer – VERY. Read this 2021 article – Ukraine Can Feed the World – https://www.atlanticcouncil.org/blogs/ukrainealert/ukraine-can-feed-the-world/

• China and the USA and Taiwan – again more uncertainty.

• Inflation – many countries are evidencing inflation rates that were thought to be consigned to history. (Tell that to Argentinians who are facing a 90% inflation rate) Consumers are worried and seek to conserve their financial resources. In many countries interest rates are now being increased – your country?

• Debt – the personal debt levels incurred prior to the 2008 Global recession have now been exceeded in many countries. Governments are now more deeply in debt than ever before. Spending power is diminishing.

• Recessions are most likely on way.

• Stability has been replaced by instability. Certainty by uncertainty. Prosperity by austerity. Peace by worry.

Key Questions: Where is the accounting industry in all of this? What are our challenges? Our opportunities. Our change dynamics?

Key Point: Change and more change It is oft said that ‘change is challenging but not changing is even more challenging’. However, that change should also be broken down into (1) Change that is as a consequence of circumstances e.g., replacing key team members, managing hybrid working arrangements (working from home) upgrading existing software and so on and change that is necessary but has not yet been fully implemented – e.g., new software, M&A options and so on.

LESSONS FROM ACCOUNTING FIRMS 

Let’s take a look at what has been happening in many firms during these past 30 months:

Q: How well have firms performed during these past 30 months? What lessons can we learn?

A: From all the emails and reports I see and from all the accountancy firms and associations I work with the past two years have been challenging, really challenging but financially growth and profitability have definitely been on the upward curve. The reasons for this are many but include:

• Reducing overhead (rent, travel costs, stationery, light and heat) 
• Making some deadwood redundant, providing additional Covid-related services to clients
• Increasing prices against the backdrop of higher levels of inflation
• Delivering increased levels of non-compliance services – e.g., Client Accounting Services and Cloud-based services.

Key Action Points

In the Upcoming 12 months:

• Firm owners to (with the exception of the managing partner) maintain a minimum of 1,000 charge hours
• Firmwide – productivity of at least 60% of all hours
• Maintain realisation rates of not less than 85%
• Develop your specialisations and arising revenues – many firms – especially in the £2-£5 million (2.5 $6US) range report revenues around the 25-30% for all non-compliance revenues – that is significantly increasing
• Focus as much as possible on value added face to face client meetings – what I refer to as Visible Time. Be careful of defaulting to being behind your desk
• Better manage Lock Up (WIP at realisable value and debtors/receivables) – maximum lock up of 22 per cent
• Increase your retainer revenues
• Greater workplace flexibility. The past 30 months have seen a seed change that is most unlikely to ever be reversed. The Tipping Point of Covid demonstrated that WFH was possible, productive and approved of by most. The value of reducing commute time and travel costs. Increased working options and so forth
  
  O yes, this all comes with consequences, but your team now have the upper hand. I have received a number of reports in the last year from South Africa, Australia and the USA where staff have handed their notice in only to be employed by firms the other side of the country. A mobile workforce – well mobile to a point as they base themselves at home and meet everyone on the team online.

THE TRAP TO AVOID

FTI – as you may have read before that is Failure to Implement. I work with my accounting firm clients, agreeing strategy and focus. I then meet online every month for review meetings. The key objective to a certain extent is hand holding or perhaps may I call this accountability. Making sure firms deliver on their plans.

With change and the necessity for change all around us FTI must not occur – the world is changing so fast that staying relevant, efficient and informed is now more important than ever before.

An Anecdote: I read the recent August report from Inside Public Accounting. This included a number of managing partner anecdotes. One of these captured my interest:

“Today’s perk is tomorrow’s entitlement” Isn’t that true? We might freely give but taking away is not always easy. Millennials and Gen Z do have entitlement tendencies – do you agree? Their primary focus is not necessarily focus on levels of pay but flexibility, culture, challenging and interesting work often feature on their menu of expectations and desires.

LESSONS FROM AN TECHNOLOGY COMPANY 

I am currently consulting with my first non-accountancy business in 25 years. This is a 28-person technology company. During my diagnostic processes I established that the firm gives an annual Christmas bonus, but no one team member knows what to expect – there are no written criteria, the bonus is based on the Managing Director’s discretion. He had only intended to give a bonus on one occasion as a result of a highly successful year … but now the staff are all expecting an [increasing] annual bonus. 

WHAT ARE STAFF ONCOSTS? 

Staff costs have nudged up considerably during the past 20+ years. Across a range of countries and firms these costs include:

• Salary increases above inflation
• Increased holiday costs
• Pension costs
• Sickness insurance
• Long term disability benefits
• Paid time off
• Compassionate leave
• Paid pet caring (that was introduced as an inducement for staff to return to the office)
• Discounts for shops, childcare, gym membership
• Payment for 100% of gym membership
• Subsidised or free staff canteen – Journal of Accountancy tells it like this of one CPA firm, “Because a nutritious meal can increase stamina, brain power and well-being, the partners offer a complete restaurant-grade kitchen for employees too busy to go to lunch. Staffed by a full-time chef, it’s used for daily lunches, dinners during busy season, meetings and occasional special events.” The Journal continues – Between meals, the firm offers up bagels, biscotti, gourmet coffee, soda, juice and seasonal fruits every day. That costs $45,000 a year, “but if we pick up four billable hours a year for 200 people, that’s $80,000,” The partners ask staff members to make a contribution to the firm’s charitable foundation for the value of what they eat and drink 
  See the JOA article
• Dental and vision care
• Flexible working
• Per diems to cover travel
• Discretionary bonuses
• Technology reimbursement
• Long Christmas /New Year break
• Jury duty leave
• Matching employee charitable giving
• Recruitment initiatives – bounty payments
• Fun in the workplace – an example – GRF CPA’s – “We work hard and play hard. GRF employees enjoy holiday parties, happy hours, baseball game outings, take your child to work day, community service projects, and participation in the firm’s softball team among other activities.”

THE CONSEQUENCE

In many firms operating margins are reducing. People costs now exceed 50%. All of this while there is, and always has been, pressure on the top line. Reward staff. Treat them well. But at the same time keep an eye on your margin. That is why increasing prices by inflation + 5% and ensuring that you attain a minimum of 85% realisation are key to a profitable and healthy firm. Why are so many firms seeing increases? Firstly, they are doing things right. Secondly, some firms are achieving increased profitability, but their people are suffering burn out. Long term that is not sustainable.

AND FINALLY

We will continue our 2022 review to date. The inspiration for my next blog in this series is a snippet of a Bloomberg TV programme – really very interesting and 100% relevant to the future success of your accountancy business.

I have been honoured to help a number of my readers – for a FREE introductory meeting please contact me – mark@marklloydbottom.com

Until the next time – I thank you for your interest in all things Practice Management, Performance and Profitability