Guest practice editor Mark Lee, talks to financial management expert David Lewis about why SMEs need more than an annual visit from their accountant.

A news item [1] that appeared on AccountingWEB.co.uk in January referred to a survey that indicated that entrepreneurs regard their accountant as their most trusted adviser. At the same time, the article said that 82% of clients felt they would like better guidance from their accountants.

This reminded me of a conversation I had with David Lewis towards the end of last year. Lewis had attended a credit crunch seminar provided by one of the mid tier firms of accountants. One of the presenters, an insolvency practitioner, had expressed the view that 80% of SME insolvencies were caused by poor financial management and this was primarily due to a skills gap.

Whatever the exact statistics for SME insolvencies, most accountants have clients whose year end accounts involve major reconciliations and require a vast number of adjustments to get any semblance of sensible figures. If clients cannot cope with basic accounting in good times, how are they managing the business in difficult times?

We all know that even when a business has a reliable bookkeeper, historical information is unlikely to give an indication of where a business is heading, especially in the current environment.

Ken Barber of IBC (Independent Banking Consultants Ltd), which helps businesses raise finance says: “Many businesses have grown over the past few years without minding the back office. Risks have increased and banks have become more cautious. Not only is it essential for businesses to get the basics right, they need to have a forward thinking approach to financial management”.

“Banks do not like shocks or surprises and are more likely to lend to businesses that are properly controlled, provide reliable and prompt financial information and where nasty shocks are less likely”.

Filling the skills gap
The core business for most smaller accounting practitioners is year end accounts and tax. While business models vary, many practices deal with a large number of clients and time constraints (plus, often the lack of depth of the client’s pockets) will limit the amount of advice that can be given. Although large businesses will usually have a full time qualified finance director, many SMEs may instead have a skills gap.

One answer for SMEs is to engage a part time FD. (SMEs are distinguished from micro businesses, where a part time FD is only likely to be a viable solution as the business is well capitalised and there is an ambitious business plan.)
While a part time FD will add to overheads, the charges are likely to be lower than the charge-out rates of partners in the practice.

However, as Lewis explains: "The extra costs are likely to be more than recovered through improved financial management. Benefits may include a reduction in working capital and bad debts, reduced costs, improved processes and an insight into what is really happening in the business”.

A part time FD can also help the business manage risks (e.g. identifying whether the business is over dependent on key suppliers or customers). In addition to improving cash management and hopefully avoiding the shocks feared by the bank, the FD should add credibility to the business’ relationship with stakeholders.

They are also likely to have experience of several other businesses and bring new perspectives to the business but in Lewis’ experience, some entrepreneurs will want to ‘do it their way’ and will not take advice on board.

"The introduction of an FD service is likely to be most beneficial when the owner buys into the concept and is prepared to listen to advice. Where this is not the case, it may be best to take a rain check", he says.

Some practitioners may see a part time FD as a threat to their own services. However, the skills sets are very different and the FD’s services will often complement those of the accountant. While the impact a part time FD will have will vary between businesses, it could make the difference between survival and insolvency and therefore also continuity of the accountants’ annual fees.

Managing FD involvement
What do accountants need to consider if they think that a client should take on a part time FD? A number of FD organisations can be found on the internet, although it is worth bearing in mind that some of these are simply marketing networks or franchises and a premium is paid primarily for the name/marketing spend. Others appear to be cohesive organisations where people with different skills can be called on if necessary and where you may get more bang for your buck.

An alternative to the FD organisations is the sole practitioner option which is likely to be less costly. Generally the difference is similar to sole practitioner accountancy firms compared with their larger more well known counterparts and it is equally advisable to get recommendations/references.

Both the initial engagement and continued involvement will need to be managed. “It is important that deliverables and objectives are agreed up front”, explains Lewis. “Part of the work may include improving systems and processes and in due course helping the client’s staff develop their skills. Success in these areas should lead to a reduction in time that the FD needs on an ongoing basis”.

“Changing circumstances, may mean that there are changing needs. For example where a business grows, a point may be reached where a full timer needs to be recruited. Incidentally, the part time FD should be able to help with the transition”.

The right advice
I've noted before that some accountants also badge themselves as business advisers and that the current climate demands evidence of this. Equally, it seems (rightly or wrongly) that the business community generally expects accountants to provide advice. If the survey results I referred to earlier are correct, then many accountants are not meeting clients’ expectations.

Accountants may go some way to meeting their clients’ expectations by asking them about their view of the outlook for their business and how they are managing the finances on a day to day basis.

“While specific questions may vary, the underlying issues are likely to centre around whether the owner is confident that he or she understands the current financial position, has a handle on where the business is heading and whether key risks are being managed”, says Lewis.

One of the risks could be continuity of funding and it may be appropriate to make sure that clients are aware of the more stringent requirements of banks.

While the current environment may lead to a greater focus on risks, Lewis also is keen to point out: “Changing conditions may also create opportunities; this could range from the demise of a competitor through to a change in emphasis in the products or services on offer. However, taking advantage of opportunities may absorb cash and create new risks, so a planned approach is advisable”.

These are challenging times for businesses and the tax bill may not be their most taxing problem. If the worst happens and there is an insolvent liquidation or administration, then directors’ (and shadow directors’) conduct will come under scrutiny. This can potentially result in personal liability or a disqualification order (i.e. as a director) and no brownie points will be won for poor accounting/financial management.

"It is advisable to act sooner rather than later, and a little time spent talking to clients about their concerns and needs may have a lasting impact", explains Lewis. Clearly a part time FD may not be the solution for every situation, for example there may be a more pressing need for a sales or marketing consultant.

However, some TLC and, where the accountant cannot devote sufficient time to provide the help needed, guidance as to how clients can find solutions, would not go amiss. This should benefit both clients and their view of their accountants.

david@camroseconsulting.co.uk [2]
www.camroseconsulting.co.uk [3]

David Lewis is a former partner in a medium sized accountancy firm and now provides financial management and project services through Camrose Consulting.