The last three years have proved extremely difficult for many professional practices. The recession has brought unprecedented pricing pressures, uncertainty and volatility in the business environment. At the same time many professions have needed to adapt to increased regulation and changes in their profession’s obligatory requirements. Many businesses have been forced to cut costs, and for people-based businesses this has often taken the form of redundancies, recruitment freezes or shorter working weeks. In many cases businesses have been left less able to cope with sudden fluctuations in demand and, unless cuts have been carefully managed, faced reduced internal control and a slowdown in the production of management information. Some businesses have turned to outsourcing as a way to ensure the receipt of timely information, while also reducing costs to the business. Tom Ward of Moore Stephens LLP explaines:
To survive, businesses have become more focused on cash and the monitoring of key performance indicators that can flag up future shortfalls. Banks, under pressure from governments, have been supportive, though as ever have needed to be kept informed of anticipated problems. Most partners or members of LLPs realise that a failing partnership can result in the repayment of drawings and profit shares from previous years. This has further increased the need for accurate and timely management information, tighter budgetary controls and more focus on forecasting. Work-in-progress may be a recorded asset, but that doesn’t mean it will necessarily be realised: analysis of ageing will often provide an insight into whether it is likely to be recovered at full value. In all cases, work-in-progress must be managed and converted to debts and cash as quickly as possible. Close monitoring of debts is essential and, wherever possible, clients should be requested to make payments on account. Factors underlying the profitability of the business such as recovery rates, chargeable hours and staff utilisation rates need to be monitored.
With increased pressures on personal performance, there is a greater risk that proper due diligence on new business opportunities is not undertaken. There is, therefore, an increasing need for a formal process for evaluating new business risks and ensuring that expected returns match the risk profile. There are substantial benefits for businesses that do undertake formal risk management assessments. When properly completed, such assessments don’t only provide formal documentation of the risks inherent within a practice, but also allow management to decide on appropriate actions to take to mitigate these risks. They provide a way of evaluating where actions need to be focused and, in some situations, where costly controls have been implemented that provide no benefits. Time spent on such risk management activity will be worthwhile. When businesses require outside finance or are considering a merger or acquisition, the quality of risk management is one of the first areas questioned. It is also a priority area for regulators. For example, solicitors are required by the Solicitors Regulation Authority to run their business or carry out their role in the business ‘effectively and in accordance with proper governance and sound financial and risk management principles’.
Constantly changing legislation is another minefield for businesses to face – another risk to be managed. It is essential that businesses have processes and policies in place to minimise the risk of breaching legislation, including measures to ensure they avoid incurring unnecessary fines and penalties from the authorities and claims from staff, clients and suppliers. It is the employer’s responsibility to ensure that staff are fully informed of relevant legislation; with people businesses, this encompasses a large number of diverse regulations including Health & Safety, the Bribery Act and Money Laundering legislation.
The economic landscape in 2012
Recent economic surveys suggest the UK economy will avoid a further recession and there is a general expectation of low growth in 2012. Practices should be monitoring changes in the marketplace so that they can benefit properly from the recovery. Growth is still erratic and varies from sector to sector. Demand for advisory services is increasing, but often the timescale between identifying the need and engaging the professional is lengthy and difficult for the advisor to manage. The Olympics and to a lesser extent the Queen’s Diamond Jubilee will create opportunities and should help to generate growth. It is estimated that the Olympics will increase economic output in the UK by £1.37 billion per year until 2015. This growth is a result of increased visitor numbers, with the hospitality, accommodation, telecommunications and transportation sectors benefiting directly. Other businesses can also benefit from the feel good factor, however, especially if they buy into the Olympics and facilitate staff involvement, even if this only encompasses providing access to screens to watch high profile events.
Potentially there will be financial benefits for all, but the Olympics may also create problems for many London-based businesses. Getting to and from work may take substantially longer, so businesses could consider allowing staff to work from home and dial into office networks. This will create strains on IT and the internet, which will be exacerbated whenever email traffic is high – when Team GB wins its first gold medal, for example. Furthermore, businesses that rely on temporary staff may well find that unless they plan in advance, there are no suitable people available.
Acting before the dust settles
As the economy picks up, there will be growing competition to attract and retain key staff. It is therefore essential that professional practices have in place career structures and incentives to motivate their staff, and powers to restrict activities of senior employees if they decide to leave. We have already seen a move away from time-based billing to methods based upon perceived value. As a result there is an increasing awareness of the value attached to individuals, teams and specialities. During the recession the numbers of people moving voluntarily has reduced, and senior management has had little difficulty in retaining key staff. But that will change once the economic upturn gets underway, so businesses must act now and make sure they won’t be left with too few staff in key roles to benefit from new work. History has shown that more businesses go under after a recession has officially ended than during the recession itself. Banks still hold non-performing loans which they will wish to realise when possible, especially given their own pressures to strengthen balance sheets. As cash flows improve there will be more opportunities to realise asset values and greater likelihood that loans will be called in. Government agencies have provided lifelines through deferred payment terms for tax, but these have also started to be tightened up. With real time processing of PAYE and NI for payrolls there will be less scope for ’unauthorised‘ tax payment deferments. Growth in itself can also provide financial difficulties however profitable the business, with pressures on working capital.
Businesses must therefore continue to adopt practices introduced during the recession: manage cash, monitor debtors and work-in-progress and guard against making excessive allowances for ‘favourite’clients. They may have paid their bills so far, albeit slowly, but that doesn’t guarantee they will in future.