Ex-Beatle George Harrison said in 1970 that “for every 100 pounds we’ve earned, we got a 100 pounds worth of problems to balance it.” Anyone who runs a business will know that feeling.
You’ve probably heard variations on this theme like “10 employees is a team, 100 employees is a nightmare” and so on.
These phrases, as cliched as they might sound, point to an underlying truth about companies whose turnover exceeds around half a million pounds. They have becoming living, emotional, temperamental beings whose hunger for cash never seems to diminish.
£500,000 might not sound a lot but, from that budget, the prices of the goods and services needed to fulfil orders must be factored in as must wages, commissions, rent, rates, software, professional fees, advertising and marketing, taxes, directors’ remunerations, and so on. There may be thousands of transactions inbound and outbound which have to be accounted for.
At this point, it becomes harder and harder, even with managerial support, for owner-directors to be aware of everything that’s going on.
If the owner-director is pushing his or her team for growth, they may be relying on earlier systems and infrastructure to handle the processing and fulfilment of orders which were not designed for these higher volumes.
A successful push for growth often hides deep and sometimes fundamental problems within the business plan, the staffing, and the organisational structure of a company which only become visible later on and which come back to haunt it.
Many companies bring in a part-time financial director or a non-executive director at this point but a growing number of owner-directors are turning to their accountants to operate in an overseeing and advisory role.
What opportunities are there for your practice with advisory accounting, particularly in a world still beset by economic disruptions because of the COVID-19 pandemic?
Why you and not a part-time FD?
Before we look at “why you?” from the client’s point of view, let’s consider “why you?” from your point of view.
The number of accounting firms in the UK is at an all time record high. Even though you may service sole traders, partnerships, freelancers, and contractors, the highest fees are really only available when servicing established limited companies.
There are around 350,000 active limited companies in the UK and around 16,000 accountants. In other words, there are around 22 limited companies for every accountancy practice in the UK. The only similar professional services industry with this level of competition is the recruitment sector.
Although only one in five choose their accountant by the price they charge, sole traders, partnerships, freelancers, and contractors have much tighter budgets in general.
Their current accountants will advise them to convert into limited companies because of the tax advantages they’d benefit from but they haven’t reached this stage yet.
Therefore, the fees you can charge limited companies with turnovers of more than £500,000 are significantly greater than a sole trader turning over £100,000.
The owners of limited companies turning over £500,000 a year or more will want to do one of two things generally:
- keep turnover at its current level and look for ways to maximise profit or
- use cash flow (and, in some cases, external finance) to fund a period of growth.
Why you to help them achieve their goals? As their accountant, no-one outside the company knows the business better on preparing financial forecasts, developing a strategic path ahead, improving profitability, and retaining as much cash as possible during periods of expansion.
You’re in a better place to see the problems lying beneath the surface within a business and to determine whether the current staff and structure of the company are capable of achieving the goals of the business plan you’ll agree with your client.
A part-time FD or a NED would, of course, have access to your client’s financial records but on a much more intermittent basis that you as an advisory accountant.
Your accounting practice and your personal business acumen are much better positioned to meld into the corporate structure of your client.
In addition to advising your clients on how to achieve the goals they had set out, you’ll also have an opportunity to earn significant fee income if you are advising your client on:
- readying their business for investment or
- their exit strategy
Readying for investment
A proactive advisory accountant is particularly important for companies wanting to source external finance or investment for the purchase of new equipment or for a speculative period of expansion.
The larger the sum of money required to fund a client’s plans, the more scrutiny it will undergo by either funders or investors.
They will want to see predictable revenue streams, a healthy profit margin, evidence of market demand, a stable and nimble management team with a track record of success, the right staff at key pinch points within the company, and a strong business plan.
The presence of an advisory accountant throughout the process with the promise that you will be there to motivate, guide, and instruct the management team to hit the targets set out in the business plan will be one of the most attractive features of any potential investment.
Taking a company to market should be planned for up to 18 months before it’s finally offered to sale to investors and other parties.
While the purchasers of businesses buy companies for the value they can add to them over three years, the best way to secure the most advantageous price for your client is to make sure that, during the due diligence process, there are fewer reasons for the buyer to try to haggle the price down from the originally agreed amount.
In your role as advisory accountant, you’ll need to make sure that:
- the management team post-handover is capable of running the business without its current owner-directors and be able to prove that and
- the current structure and staff of the business can be built upon rather than need replacing.
An 18-month lead-in time also gives you the opportunity to build a library of documents for the due diligence process and keep it up to date on a month-by-month basis.
In those cases where the exit is the transfer of the business to family members, your role in readying the business for handover will be particularly crucial if the owner-directors stepping down will rely on the company as a source of income in retirement.
What do you need to change to offer the best service?
To offer the best advisory accounting services to your clients, you need to ensure that you have a deep and historical understanding of how your client’s businesses have got to the point that they have.
What has aided a company to get to its current position and what has the potential to prevent them from getting them to where they want to be?
You’ll need access to constantly updated financial records so that you can check on your clients’ progress regularly, report back to them, and advice on whatever course of action they need to take if things aren’t going to plan.
We understand that, if you and your team are already dealing with hundreds of client accounts at the same time as offering advisory services, there is a risk of periods of very high demand on you and your staff at certain points of the year.
To assist small accounting firm owners to overcome this situation, we developed Hindsight, a specialist plug-in app for Xero, over the period of 18 months.
Hindsight automatically logs in to each of your client’s Xero accounts once a day. It downloads all of the new information it finds for each client and then analyses it with a view to alerting you to certain events – amount in a client’s bank account, level of indebtedness, last bank reconciliation, debtors days, last invoice issued, and so on.
If a flag is triggered, it notifies you or the team member to whom you have passed the responsibility that action is needed. At the same time as flagging the event, Hindsight also contains information and tips on how to present the issue to the client with the goal of resolving it as quickly as possible.
Hindsight is designed to keep you and your team constantly up to date with the state of each client’s businesses thereby greatly reducing the often very large amount of retrospective work which needs to be done at year end or period end to submit Self Assessment, CT600 forms, or accounts to Companies House.
Hindsight saves time, improves the level of service you often to standard and advisory clients, and divides the workload better and more evenly between you and your staff over the course of the year.