Practices in distress - waving not drowning

Distressed businesses are certainly not an unfamiliar sight in these trouble times, but economic problems have become so acute that now the very firms tasked with helping business avoid or get out of trouble are struggling themselves. There have been a number of articles in the news recently with regard to accountancy practices experiencing difficulties in the current financial market place. The red flag put up by Begbies Traynor recently showed that the number of practices in trouble has gone from around 100 to over 500. This is probably the tip of the iceberg.

We have, of course, the experience of the recession in the late 80s and early 90s. At the time it was a surprise to discover how fast an accountancy practice could actually fail. Many practices and practitioners had borrowed substantial sums to either buy a practice, buy into a partnership or fund an acquisition. In addition, many had used unsecured practice funding to get into the property market. The end result was that going into recession heavily borrowed saw the rapid demise of a number of practices. The scenario went something like this…

Firms found themselves up to the limit with overdrafts and loans. A request for an increase of a facility would inevitably be turned down at this point in time. Clients of the practice slowed down on making payments so the aged debt analysis was extended. Not enough money was coming in to pay the wages, resulting in staff leaving as they were not being paid. No more work. No money coming in. Termination of business.

So what can be done to minimise the risk of this happening to your firm during the current recession?

The first and most important issue to be attended to in times of restricted banking facilities, recessions, credit crunches, whatever you want to call it, is to ensure that early action is taken to minimise the impact as much as possible. Sadly, many will fail as efforts to revive the practice will be instituted far too late. A common issue with regard to commerce and industry.

Accountants have been known to do exactly the same. The first item to be dealt with is to ensure that there is sufficient cash flow to maintain salaries, drawings and expenses. If this is not the case, then these need to be trimmed as fast as possible well in advance of the expected downturn in income. With accountants’ debtors and work in progress still running around 6 months of turnover, there should be plenty of warning of trouble ahead.

The second area that requires effort is in fact the very thing that most people do not do. There is an old expression that “when the going gets tough, the tough get going”. This is true of any business, whether it is an accountancy practice or any other commercial business. Accountants have never been particularly good at marketing their services to the public. Now is the time to make sure that you do. There is little new business around, but there is the opportunity to acquire clients from other practices. The effort is called marketing.

Marketing has different meanings to different people and different meanings to different sectors in business. For accountants there are only a small number of items that actually are effective. Forget the new letterhead and the new brochure.

And forget the advertising in the local newspaper, radio or wherever else you wish to advertise. It is time to do two things.

The first is to contact your existing clients. The purpose of this is to ensure that they are still viable and ok, and that you won’t potentially be working for nothing. You can then offer them support and assistance during the difficult times. They may need cash flow forecasts, they may need more up-to-date accounts for banking purposes. This activity may potentially produce more income for you.
If they are happy with your service, you can ask for referrals. Tell your clients that you are looking to expand and if they have any friends, neighbours or acquaintances in practice, perhaps they would be so kind as to refer them to you. If they have any names or addresses, you would be happy to write to them and offer your services. Client referral is without doubt the most effective means of growing a practice and maintaining your own practice in times of financial difficulty.

The second area to look at is marketing itself. An effective and very simple method is direct mail and communication. Make sure that you inform your clients of the facilities that you have available. Remind them that you are not just a bookkeeper, you can help them through difficult times. Remind them of the additional services that you may have, whether this is financial services or tax advice.

Should you have a potential client list, make sure you are communicating with that list regularly in order to encourage the potential for new clients to come to you. Other direct mail should be going to local solicitors and banks, as they may have the opportunity from time to time to refer opportunities to you.

The most important thing about mailing and direct marketing is that it has to be consistent and regular, not started for two months and then stopped because you get busy. It has to be a permanent drip into the prospective market place that you are chasing.

The message therefore is clear for practices during the current economic climate. First, make sure that your costs are under control, and that the glass is exactly the right size for the water in it. Secondly, make sure you up the marketing. Practices that undertook these activities in the last recession are those that survived it. Those that are sat like rabbits watching the headlights come at them went under.

Should accountants know better?

When accounting firms collapsed during previous recessions, the speed that it happened was quite remarkable and, for those involved, very unpleasant. Sadly, it also heralded the demise of a number of marriages. The comment we heard so many times from the wives, or ex-wives, of the accountants who had failed was “you should have known better”.

Of course, there is no reason why an accountant should be better at running a business than any entrepreneur. The reality is that they probably count the numbers better. Burying heads in the sand is not restricted to industry or commerce, it can also happen with accountants and, sadly, it is not an unusual occurrence.

One particular practice I recall was trading reasonably well and surviving the recession at that time and its bank facilities were due for renewal. The practitioner admitted to their bankers some of its debtors were probably doubtful. He was being totally honest. Within 24 hours he had a letter from the bank withdrawing facilities and effectively putting the practice into liquidation.

Ron Goldsmith is director of Goldsmiths Practice Services LLP.