THE ECONOMY continues to be challenging, as the strong recovery anticipated last year has turned into a low growth environment. Trading conditions, both for the wider economy and the accountancy sector, remain difficult and business activity will continue to be slow for the foreseeable future. Given the service nature of accountancy, the macro-economic situation has a substantial impact on the sector, which means firms will have to work harder to find and retain clients.
A contributing factor to the difficulties faced by firms is the level of over supply in the accountancy sector – competition for business is fierce and clients are increasingly able to negotiate harder on fees. This has put firms under sustained pressure to lower fees, putting a squeeze on margins.
One area that has been hit recently is services for the public sector. The reduction in government spending has meant existing public sector contracts have been affected by cutbacks, forcing firms to reassess their strategies and look for revenues elsewhere. Restructuring and recovery practices, traditionally a counter-cyclical balance for many firms, have not been as active as forecast. Historically low interest rates have led to lower than expected levels of insolvencies – which clearly has been helpful to the economy as a whole, but has meant less restructuring work than in previous downturns.
Despite the challenges, accountancy firms have adapted to the tough times. They have embarked on a course of internal changes and restructuring, as they look to slim down and increase efficiency and profitability. The watchword for the past year has been re-evaluation; firms have needed constantly to re-examine their business models and ensure they hold on to their existing client base, as it has been more difficult to find new opportunities. However, this means firms will be well placed to take advantage when activity returns. Strong management and a carefully thought-out business plan are the major factors banks look for when assessing funding. Banks have continued to lend to the accountancy sector throughout the downturn, but for firms to have the best opportunity of securing funding they need to show a clear and well-defined strategy that demonstrates a thorough understanding of current market conditions. From our experience, the best firms are able to work and manage a variety of stakeholders – clients, banks, advisers, consultants and staff.
The main difference between now and a year ago is that expectations are now much more realistic. As one senior partner told us recently,” the most important thing at the moment is for firms to hold their nerve.”
Planning for success
There are several factors that can affect a firm’s ability to succeed in the current climate. First, recruiting and retaining top talent has proved to be of paramount importance recently. A strong and effective leadership is key to navigate a downturn, and the value of having experienced senior partners in charge is enormous. However, with the larger firms continuing to recruit at all levels, smaller businesses can find themselves struggling to compete on salaries. Wages are the biggest cost for most businesses, accountancy firms included, and in a recession a careful balance needs to be struck between retaining talent and managing the bottom line. Because of the salary competition, and the crowded nature of the market, firms are closely monitoring their peers to ensure they remain competitive with the rest of the industry.
Success also depends on contending for a share of the existing market. Many firms are also looking at expanding their services internationally to diversify their income streams and take advantage of stronger economies in some overseas markets.
Another major key to success is strong financial control. Working capital management is more important than ever and needs to be a central part of any firm’s operational strategy. Good cash flow forecasting and a sound business plan are the essence of effective working capital management. Firms that are able to take into account potential hits, such as the loss of a prime client, further downturns, actions of competitors and other unforeseen events, will be better placed to boost their cash reserves.
Good use of funding is another aspect that firms should consider when drawing up their financial management strategies. Banks remain open for business and continue to lend to the accountancy sector. While traditional overdraft funding, partner capital loans and asset-based lending will remain the cornerstones of any funding structure, many firms have taken the opportunity in the past year to refinance their longer-term facilities to take advantage of current low interest rates.
With an increasing percentage of revenues derived from overseas, particularly with the larger firms, the need for sound risk management in what has been a more volatile currency market has increased in importance. Balance sheet translation risk and hedging revenues from overseas are areas we have been more involved in recently.
Future in 2012
The outlook for the next six to 12 months is likely to remain unchanged and the business environment is likely to remain cautious. The expected strong upturn has not materialised and this has had an effect on business strategies. However, business opportunities are still available for efficient and competitive firms both across the UK and in overseas markets and we are committed to helping firms with strong and realistic strategies take advantage of these opportunities.
Kevin Pearson and Martin Prentice are relationship directors at Lloyds Bank Corporate Markets
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