In recent months there has been much speculation among economic pundits as to when, rather than if, we are heading into an economic downturn. The effects of the sub-prime mortgage fiasco in the US and, closer to home, the collapse of Northern Rock have given everyone the jitters.
The major high street banks have acknowledged that their results for 2007 will be far from spectacular and admitted that 2008 is likely to be a ‘challenging’ year; the government has been forced down the contentious path of nationalisation with Northern Rock and the popular press have their fingers on the panic button.
But has this unease filtered down into the accountancy profession? During December and the early part of January, Kato contacted partners in more than 200 independent accountancy practices to question them on their business confidence. Were they carrying on with business as usual or battening down the hatches?
The fact that so many of the insolvency practitioners we spoke to anticipate business failures in the coming months indicates that most general practitioners are worried. Business development plans are under review, with firms focusing on survival rather than expansion.
There is certainly a fear of losing business as a result of clients going bust, or falling fee income if general belt-tightening reduces the demand for added-value services. There is also acknowledgement that increasing competition will put pressure on fee levels and squeeze margins.
Cashflow is identified as a major problem and this has its roots in the anticipated bad debt levels. However, credit control and productivity are also areas in which many firms struggle, and this has been the case for a long time. Those with high WIP and debtor levels could suffer.
Firms are conscious that their clients are vulnerable to predation and competition both from rivals in the independent sector and from larger firms discounting fees on compliance work for the opportunity to sell in more profitable added-value services all a more pressing concern than it used to be.
For some time now, there has been little expansion in the market for compliance services. Indeed, this sector has become almost exclusively price-led and while some have developed a factory processing approach to increase workflow and profitability, others have decided to give up the struggle with the regulatory regime and clients who are interested only in finding the cheapest option.
The path to growth is undoubtedly through transaction-led services. Business consultancy, corporate finance, financial services and wealth management: these are the areas where firms should be looking to replace the profits from compliance work. The problem is that many of them are simply not geared up to do so certainly not in time to stave off the effects of a major recession if one should strike.
Phil Shohet is a director of Kato Consultancy
