PracticeAccounting FirmsAccountants and the crisis: SMEs – a route through the gloom

Accountants and the crisis: SMEs - a route through the gloom

Accountants have a crucial role in guiding small businesses through the dark of the downturn

The UK’s SMEs, faced with tight profit margins, few overheads to cut and
limited access to credit, are particularly vulnerable to the downturn.

SME directors questioned in a survey earlier this month said they had become
more negative about their prospects in the past six months. The survey of
directors at 163 companies by Bowmark Capital found a sharp fall in confidence,
with many respondents criticising the government for a lack of support.

As recession looms, big businesses will seek funds or advice from the stock
market, investment bankers and even branding gurus, while smaller ones will rely
on their accountant.

Despite the gloomy economic outlook, experts say accountants should see the
downturn as an opportunity rather than a threat. They reckon accountants are
well placed to expand in the SME sector and cement their reputation as valued
business advisers.

Stephen Alambritis, chief spokesman for the
Federation of Small
, which has more than 215,000 members, says: ‘Accountants are one
of the most trusted sources of advice for small business. When we ask our
members who they look to for advice, it’s always accountants.

‘Invariably the founder of a [SME] business will still be with the same
accountant that helped them set up the company. A large company will have
outgrown their accountant and gone to one of the Big Four firms.’
Alambritis adds that accountants need to see their SME clients more often during
an economic crisis to help them review their business and identify areas where
costs can be cut.

Sounding board

Barry Ross, head of corporate restructuring at PricewaterhouseCoopers, says
that accountants working with or for SMEs should act as an ‘objective sounding
board’ to the management.

Ross, who specialises in the SME sector, says accountants need to help small
businesses plan for different business scenarios, such as a 10% contraction in

They need to consider the following: ‘What are the most likely scenarios to
transpire and what impact would they have on the business, its customers
suppliers and competition?’

A good accountant will encourage their clients to imagine a range of
scenarios, even if some of them seem unlikely at the time.

‘No one can control the oil price, but you can plan for the impact,’ says
Ross. ‘If you said to people a year ago: “Let’s have a scenario plan for an oil
price of $130 a barrel,” people would have said you were being ridiculous.’

Back to basics

The downturn will also place renewed emphasis on one cornerstone of
accounting ­ tracking cash in and out of the business.

Late payment by suppliers is irritating when the economy is booming, but can
become a serious problem when the economy slows.

‘At a time of growth people tend to focus on profit and in a time of downturn
people tend to focus on cash,’ says Ross.

‘As we have had 18 years of growth, management is not used to focusing on
things like the company’s balance sheet and how much headroom it has with its

When ‘cash is king’ accountants can help their clients by chasing up cash
from debtors, checking their credit references and keeping an eye on the
financial health of suppliers.

‘Most companies have a limited number of suppliers and if just one goes belly
up the whole business could be at risk,’ says Clive Lewis, head of SME issues at
the ICAEW.

Accountants should be prepared to tactfully remind managers to get back to
financial basics and keep banks and suppliers updated about changes to the
business, according to Ross. He gives one example of a successful SME client
that had run into liquidity problems.

‘The company was on the brink of breaching its overdraft, but the owner
didn’t understand why the bank was upset when the company was growing and needed
to breach its overdraft to keep growing.’

Software support

Technology can also help ease stress levels during the credit crunch. Sri
Rajaratnam, director of finance and internal operations at Visiting Arts, a
charity that promotes inter-cultural understanding through the arts, uses
financial software from Validis. The software analyses accounts and business
processes and highlights possible errors, such as unpaid bills, or rogue

Although Rajaratnam says the charity is on a firm financial footing, he is
acutely aware of the credit crisis and the possibility of the charity’s funding
sources changing.

‘My bookkeeper left and it took a while to hire a new one,’ he says. ‘They
operated in different ways and the [Validis] software picks up errors that I
might otherwise have missed.’

Sharing advice

Often it is the informal advice and support ­ beyond time-logged billable
services ­ that SMEs most appreciate. ‘It’s about holding a client’s hand
through the difficult times,’ says Lewis.

One way of doing this is bringing business clients together to discuss common
worries and share advice.
‘Some accounting firms will write to a dozen clients to their offices,’ he says.
‘There might be a presentation from a bank and one of the firm’s partners to
indicate where the market is going.’

These types of innovative services from accountants will help their clients
survive the credit crunch and strengthen an already close business relationship.

‘If it’s sunny they say the bank manager offers an umbrella and if it’s
raining they take it away,’ says the FSB’s Alambritis. ‘At times like these the
accountancy profession really comes into its own.’

An adviser’s survival guide for small businesses

Implement tighter cost control

Review costs carefully in terms of their value to the business. Consider the
costs that are actually needed to run the business. Avoid the temptation to
immediately cut marketing expenditure as this can have a significant impact on
your competitive position, especially as market conditions begin to pick up.

Revisit your strategy

When market conditions are changing rapidly, you cannot assume your existing
product and market strategy will continue to be successful. Combine market
research with financial information on year-on-year performance and comparisons
with budget. Determine which product lines, sectors and customers are likely to
put pressure on profitability, and which present the better tactical
opportunities in the short term.

Keep an eye out for bargains

The mid-market is still fuelling merger and acquisition activity.
Be alert for opportunities where owners are looking for quick exits rather than
trading through a more difficult economic period.

Align performance and rewards

Motivation can take a hammering when business is lean. Once
you have defined your key objectives make sure staff understand and are rewarded
for achieving those objectives. If the cash simply isn’t there to make bonus
payments, do not bury your head in the sand. Consider alternatives, such as a
deferred share arrangement to encourage staff to stick with you through the


As the major cost to most entrepreneurial businesses is labour it is likely
cuts will have to be made. It is important to be objective. Consider the skills,
commitment and capability you need. Lock in your key talent using incentives and
personal development plans. Don’t throw away talent unnecessarily as this may
prove to be a false economy when you consider the costs of recruitment and the
loss of productivity and expertise.

Howard Hackney is entrepreneurial advisory partner at
Grant Thornton

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