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Red sign hanging at the glass door of a shop saying: "Going out of business".
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Protecting your practice from client insolvencies

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Accountants are always juggling risks and opportunities and a new threat could be on the horizon — client insolvencies. Could bankrupt clients threaten your business?

11th Dec 2023
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The economy has changed significantly in the last year as a result of the cost-of-living crisis, ever-greater financial uncertainty and inflationary interest rates that send a chill even into the hearts of the relatively wealthy.

Recent data relating to bankruptcies and insolvencies should be ringing alarm bells for everyone running a business, including accountants.

While our own operations might be stable or even flourishing, some clients could metaphorically be at death’s door, if not already in their graves.

In the longer term, this is bad for our businesses, since the dream scenario is to have a solid client base that uncomplainingly pays fees year after year, on to which we can bolt those lucrative one-off assignments that pay for the little luxuries of life and help to fund expansion or, viewed differently, our retirement pots.

That is part of long-term strategic thinking but much closer to home we should all now be looking critically at every single client to ascertain whether they are in trouble or might be heading that way.

In some cases, there may be an opportunity to make additional fees from advice and guidance that helps them survive in the longer term, whether through sales, reconstructions or voluntary arrangements.

More critically, one of the most depressing aspects of running a business happens when clients are unable to pay their fees and you are obliged to accept the prospect of a very long delay until administrators or liquidators offer a few pennies in the pound — if that. 

Be prepared or be lucky

While a level of client failure is inevitable given the current economic climate, it makes sense to be proactive and, to borrow a much-abused phrase, take back control.

Either that or be lucky. I have generally been fortunate when it comes to avoiding bad debts. The most extreme case occurred some years ago when a friend who had referred a corporate client called me to apologise for the fact that the company was unlikely to be in a position to pay its outstanding fees, to be met with the relief response that its cheque had reached my bank account at the end of the previous week.

Depending on the nature of the community in which you operate, it may be sensible to maintain a regular dialogue with other professionals who keep their ears to the ground and can inform you of a client’s impending doom.

Amongst other steps that are worth considering, everyone with responsibility for clients should be taking a critical look at their lists to see whether trouble might be looming for some of their corporates.

You might even extend the exercise and do the same for private clients who pay hefty fees but are mortgaged to the hilt and have maxed out the credit card(s), now dreading a move from a fixed rate of 1% to 2% up to somewhere in excess of an unaffordable 5%.

Cashflow techniques

Accountants will have their own views of what to do in situations of this type. Stopping work is an obvious route to protecting your practice, as is demanding to be paid upfront fees before carrying out work. Personally, I find the latter approach distasteful but each to their own.

If nothing else, ensuring that clients are obliged to pay fees within (say) 28 days and that they do so is sound practice. If they can’t manage that, then this may be the time to consider ceasing all future work.

My experience may be unique but, over the years, some of my colleagues have always kept a really tight rein on outstanding fees, while others seemed embarrassed to chase clients who fail to pay, even months and sometimes years after debts become due. It won’t take a genius to work out which of these strategies leads to significantly higher bad debt provisions.

Obviously, getting the credit control team actively involved at as early a stage as possible will help to avoid or minimise disasters, as well as allow those at the sharp end to hear of potential problems in time to take action.

The upshot of an exercise of this type could well be a number of unpleasant conversations with struggling clients. The alternative is unpleasant conversations with your fellow partners as you try to explain large holes in bottom-line profitability.

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