Hazard avoidance

In this last of a three part series on practice management KATO’s Phil Shohet and Andrew Jenner consider important strategies for balancing risk and reward

“Change before you have to” is the managing partner’s watch phrase if the firm is to be satisfactorily positioned coming out of the recession. The comfort zone of “that is how we have always done it” and thinking this will continue indefinitely is the route to failure.

It is possible to blend lifestyle with an more entrepreneurial approach and, depending upon the traditional client base of the firm, to be relatively low cost if attention is paid to the detail of organisation, control and throughput of work, full utilisation of staff, and partners who concentrate on client handling and TLC, not working at the coal face. This approach could be daunting, but there is no alternative if the business is to prosper and grow.

Practitioners operate in an environment of risk and this provides part of the backdrop for consideration in future planning when looking at the firm’s marketplace positioning. Assemble the partners of almost any independent practice, ask them to identify the top ten risks faced by their business and the strategies they have in place to manage those risks, and what response do you get? They will undoubtedly identify potential problems relating to client work and the regulatory authorities forgetting that there is a whole range of disasters waiting to happen; any one of which could seriously threaten the continued viability of the business.

Risk categories

Business risks must form part of the firm’s forward plan to safeguard client management and the revenue base and maximise partner rewards. There are four categories; strategic, operational, financial and hazard, of which the latter may seem the most obvious: every firm has insurance and complies with health and safety legislation, but what will actually happen if the offices burn to the ground? Are contingency plans in place to find alternative accommodation and get the business up and running again quickly? Are IT systems and records safeguarded or backed up offsite? A good risk management strategy has a planned response to safeguard the continuity of the business. Insurance cover does not protect against the consequences of a disaster hence insurance strategy should not be considered in isolation.

Strategic risk requires serious consideration by any accountancy practice. In an intensely competitive marketplace where clients demand an increasingly complex array of services firms cannot afford to stand still: they must develop new skills and the ability to offer added value. Such development requires considerable investment along with a very clear picture of the business, its marketplace and future direction. It also requires the management and communication skills necessary to inspire everyone in the practice and drive the business forward. Too frequently strategic planning and leadership is lacking so implementation is, at best, uneven; at worst the continuing existence of the business is threatened. The increasing merger activity in the independent sector bears witness to the number of firms that are struggling to keep up with the demands placed on them. Recognition of this gives forward thinking partners an opportunity.

Spending time on operational structure underpins every effort to build value in the firm. Every firm has an inherent value which will vary dependent on whether it can be realised internally (new partners acquiring equity), externally (a third party buying into equity), or on the open market (sale or merger). Fundamentally all the boxes need to be ticked against all the key ratios of performance, of which profit is the apex of the triangle.

Services boost

Partners should agree on what other service areas the client base will support, the quality/diversity of the client base dictating this. Largely these will be where clients need support: this could mean boosting outsource services (payroll, management accounts, forecasts, company secretarial services and cash flows); or at a higher level access to tax consultancy or fund raising/corporate finance. Every practice will identify different needs and may also have services which are proficiently provided and could be sold to other accountants or professionals.

Value has a considerable bearing on retirement and succession issues, too. Finding new equity partners is a major problem which will continue as the demographic spikes (currently 40% of partners are aged over 55). There are several reasons for the dearth of aspiring partners: personal risk averseness (lease or overdraft commitments, joint and several liability); lack of foresight, not taking a longer view, rewards are wanted now; comfortable salaries to be substituted by a profit share (more risk); and maybe just sheer lack of ambition. The large majority of Certified practices are smaller and there is a great opportunity for the ambitious to be part of a medium sized firm, looking at the longer term and maximising resources and market opportunity.

Looking ahead we can expect much more emphasis on profit growth rather than turnover growth given the likelihood of greater regulation and compliance, conflicts, and pricing pressure. To counter the perceived downside, it may be appropriate for partners to review their business structure and move away from partnership into Limited company or LLP status. Doing so may answer the questions for leavening responsibility (through non-equity directors) with risk (equity directors), providing salaries to match and, for equity participators, realising value (goodwill).

There will be an economic recovery and the variables are when and how long will it take. Action taken now to prepare for this is a positive stance. Transformation or status quo? The latter is not an option.

Questions of risk

Have you identified the firm’s ‘top 10’ list of threats and is this continually updated?
Do you allocate enough time to review these threats regularly?
Is there sufficient follow-through after risk identification?
Does any partner have experience of risk management?
Is there a fully resourced system of risk management in place embracing strategic, financial, operational and hazard risk?
Is there clear communication on risks with appropriate personnel at all levels of the firm?

A no answer to any question almost certainly means that the firm is exposed.

Solutions and actions

The ingredients for improving profits and service
Maintaining and improving the client base, being clear on the work you want and don’t want.
Prioritising and controlling to ensure faster turnaround of work with no loss of quality and standards.
Pricing to reflect the quality and spread of service.
Retaining and recruiting good (the best) staff, with development input.
Controlling staff costs and overheads, improving staff utilisation.

Hazard avoidance