With a mountain of new legislation coming in, providing extra paperwork and demanding more non-chargeable time from chartered accountants in practice, it is essential to look at the pros and cons of the new regulations, to see just how they might affect profitability.
That’s the advice being given by Adrian Gibbons, who stresses that there are some advantages, to the extra laws that accountants now have to deal with.
“Life has become much more regulated and firms need to be much more structured to increase profitability in the current climate,” he said.
While small firms do face problems from new legislation they should also look on the extra administration as an opportunity to review their practices and procedures, revise their systems and market themselves to their clients, so attracting more business and delivering it more profitability.
He cited a range of problems that could beset practitioners many of which come back to poor profitability. Increasingly firms are being valued on the basis of super profits or the return that the investor could expect from the business. He gave the example of a two-partner firm where the partners share profits equally and the turnover is around £500K. The 63 year-old partner wishes to retire at 65; he believes his share of the firm is worth around £250K based on 1 times recurring fees.
He believes the firm is worth £500K but with super profits of around £80k per annum any party buying in would value the firm at around £230K making his half share worth only £115K.
The valuation is low, as the practice is not making enough profits.
Suggestions for increasing profitability and increasing the firm’s buy out value, include looking at new opportunities such as making increased use of their audit licence or giving it up and marketing non-audit services. Increasing charge-out rates, to reflect the changed cost profile of the firm would help increase profitability provided recoverability can be maintained.
For example, a partner might charge £100 an hour, of which, based on an average 1,600 hours in a working year, 60% would be chargeable. Of this 60% charged the firm is recovering 85%therefore, this is an area where profits could be increased. Frequently these charge out rates do not reflect the cost profile of a firm- it should be 3.5 or 3.6 times the cost of employing someone, advises Mr Gibbons, not three times, as this does not take account of the cost of IT systems. Recoverability could be better managed so that the 85% is improved to 90%.
If the firm decides to stay in the audit marketplace then they will have to cope with the new international auditing standards. This will need careful management to ensure that the audit process remains cost effective. In the long run audit fees will have to rise to reflect the increased work.
It is difficult to see an opportunity in the new money laundering rules but added information on clients is always useful when marketing is being considered.
Practice Assurance is another key area of opportunity for firms. ”The aim of practice assurance is to get firms to review their systems. In my experience the better the systems the better the profitability in the firm.” Adrian Gibbons said.
“The new CPD rules from 2005 are a principles based system,” Mr Gibbons said. “The relaxation of the delivery of CPD and the focus on assessment should lead to much better development for staff and partners within the firm.
“Ultimately, better systems, increased training, and improved use of IT, as well as improving the soft skills of the team, such as better delegation and management, can all help to increase profitability and performance, “ Mr Gibbons concluded.
Click on the links below to find out how SWAT can help support you in the areas outlined above, in order to increase YOUR firm’s performance and its profitability:
Adrian Gibbons
July 2005