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10 percent balloons | accountingweb | are your profits up 10%

If your profit is not up 10%, then why not?


With inflation in double figures, every practice needs to strive to ensure that its profits are keeping pace or they will fall behind.

4th May 2023
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Given that inflation as measured by the Consumer Prices Index is still running at over 10% and food inflation is racing away at around twice that rate, the answer to the question, “Are your profits up 10%?” really ought to be a resounding, “Yes”. After all, banks and energy companies are exceeding this with ease.

Accountants have been privileged to find themselves in a sector where Covid-19 inexplicably seemed to boost business for many after a brief initial downturn, while the recession, even if it is not technical, has generally not hit us as hard as those in many other industries.

The problems in accountancy are likely to come from lack of staff, rising energy costs and, in the not-too-distant future, the prospect of some ailing clients failing to make it through to the sunny uplands that increased productivity and growth will bring, if ever we get there.

Helpfully, our profession is not unionised and therefore we do not have to deal with strikes or collective bargaining. On the other hand, at least some high-powered stars of the future will undoubtedly recognise their value and force employers to negotiate frightening pay rises on an individual basis.

Limiting costs

While there are threats, a number of factors should help to limit costs at the moment. First, there is the move to homeworking, which may temper some pay demands and will allow many firms to reduce or even eliminate office space at the next rent review. Even if that isn’t possible, we should be in a very strong negotiating position with landlords who see many empty properties on high streets and beyond.

Technology is also transforming the profession, allowing us to cut support staff to the bone without even noticing. Gone are the days of typing pools and individual secretaries, their efforts frequently replaced by staff and partners who seem happy enough to prepare their own emails and documentation and, unless they are unjustifiably proud, even fix calls and appointments.

Keeping pace with inflation

The key to ensuring that profitability keeps pace with inflation is more likely to lie on the revenue side of the profit and loss account.

Those working in smaller practices will naturally and probably accurately assume that major firms effectively have a licence to print money and can charge clients almost as much as they wish. While that isn’t quite the way that life works, in many cases rates for consultancy work just keep rising, even if audit is a drag on profitability.

For those with more modest pretensions, client resistance to fee increases is likely to be a more serious issue. There are a number of solutions, some of which offer higher risks or are less palatable than others.

You may have heard some of this before but sacking unprofitable clients to free up time for new ventures or to give better service to those that pay properly should be under consideration if you want to maintain your current luxurious lifestyle.

Increasing rates, whether fixed prices for compliance work or hourly charges to cover premium projects should also be a requirement in the current economic climate. Indeed, clients will be aware that inflation is rampant to the point where even the Bank of England and Chancellor of the Exchequer have stopped promising that it will be back to negligible levels by the end of the year.

Some clients may not be able to afford higher fees and this is just a fact of life. However, others will be doing fine and must be persuaded that your services are excellent value, even if prices are rising. Securing new clients from larger firms where they are used to paying much higher rates could also achieve the desired results, saving them money and giving you fantastic recoveries.

Re-engineer your practice

Another approach could be to re-engineer your practice. This could lead to the elimination of time-consuming work that brings in little money and may even be risky to boot. Some firms have withdrawn from the audit market completely, while others might decide that P11D and other similar compliance is more trouble than it’s worth.

The key then is to replace the turnover with something rather more exciting and lucrative. That could be as simple as ramping up marketing in areas where your firm excels, it might mean employing someone with a different area of expertise or training up colleagues or even yourself to become an expert in a new discipline.

Ironically, the people who are currently giving up the strongest messages about the way in which we should view the future are trade union leaders. While some of us may feel fearful at the prospect of persuading clients that we are worth an extra 35% like junior doctors, there is no reason why we shouldn’t seriously consider very politely requesting (accountants don’t demand) fees that reflect our efforts and increase in line with inflation.

The alternative is working harder and longer, which will achieve the same outcome but at a cost.

Replies (3)

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By mkowl
05th May 2023 11:09

I think my fees going up 10% simply offsets the costs going up 10% which from basic maths says my profit will be the same in real terms

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Replying to mkowl:
All Paul Accountants in Leeds
By paulinleeds
05th May 2023 13:58

Your income should always be more than you costs, i.e. you make a profit.

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Replying to mkowl:
By Hugo Fair
05th May 2023 17:42

mkowl wrote:

I think my fees going up 10% simply offsets the costs going up 10% which from basic maths says my profit will be the same in real terms

Basic maths differentiates between ratios (such as %ages) and absolute values.

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