Firms should speculate to accumulate

LATEST DATA from the ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) shows that business confidence has fallen to its lowest level since the third quarter of 2009, when the UK economy was still deep in recession and, as such, is an indication of just how worried business is about the future.

Perhaps this comes as no surprise given that the preliminary growth estimates for the second quarter of 2011 was only 0.2%, falling from an already fragile growth rate of 0.5% in Q1.

Market worries are not, however, just about what is happening domestically. The increasingly difficult outlook for the global economy, particularly the spread of the European sovereign debt crisis beyond Greece, Ireland and Portugal to Italy and Spain can only apply additional pressure to the faltering UK economy, while the US sovereign debt rating downgrade has also dented confidence.

For the past three years, many businesses have cut costs in order to deal with reducing revenues. In some businesses this has led to improving profitability, but cost-cutting strategies eventually ‘run out of road’.

The BCM also found firms reporting that input prices are growing more rapidly than selling prices, which inevitably squeezes profit margins.

Wages remain the dominant input cost in many industries, adding additional pressure to businesses and threatening the hopes for private sector jobs growth. So, not too much good news for UK business. But despite this, the BCM shows that businesses are predicting growth over the next 12 months, although an export-led recovery looks increasingly questionable given the fragility of our largest overseas markets.

So what does this all mean for the accountancy profession? I suspect most firms were expecting to see an upturn in business in late 2011 and early 2012. My guess is that 2011/2012 will remain difficult.

If our private sector clients are suffering, then that is bound to impact the accounting profession. Additionally, we know that government spending cuts have affected government contracts.

These factors will affect revenues in most firms and, like others, the profession’s biggest input cost is salaries. After three years’ pay restraint, salary pressure is likely to be a bigger issue in 2011/2012 than it has been in the past few years.

All of which means we will have to fight hard for every piece of new work and cost management will continue to make its way up our agenda, although growing the business will be our priority.

While the threats are clear, turbulent times can throw up opportunities and, in this regard, I predict some good M&A opportunities for those that are brave, as  firms will need to look for mergers/partners given the long lasting nature of the recession and the very slow recovery.

Scott Barnes is chief executive officer of Grant Thornton