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Opinion: Are small businesses planning to fail?

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10th May 2005
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On 10 May 2005 Amanda Fairclough was AccountingWeb's guest editor for a day. As part of her tenure she looked at the general lack of business planning. Companies which fail to plan ahead risk failure, she says - but accountants are ideally placed to offer a helping hand.

Fans of BBC2's 'The Apprentice' will recall the infamous venison soup episode when nice but miserable looking Ben was fired for failing to set a budget for his team's task. From the back seat of his taxi ride to the station, he admitted glumly that he had failed to keep a track on expenditure, largely because the margins in his business are so high that he doesn't need to. Ben owns his own headhunting firm.

Apart from reinforcing some bitter prejudices about the recruitment industry, Ben's attitude to budgeting is typical of what I've observed of the small business owner-manager. Their only goal is to maintain profits and drawings levels without worrying the bank manager. Why bother to put that in a written plan?

A much quoted research project by Yale University found that only 3% of people had written goals. I suspect that statistic is not much better for small businesses. Without defined targets or KPIs and armed at best with basic management accounts lacking cash flow statements or commentaries, small businesses face a challenge similar to reaching the North Pole without a map or compass.

It seems to me that we practitioners are in danger of missing a golden opportunity here. Instead of tacitly colluding with our clients' head in the sand approach to business planning, we could be proactive in our service delivery. We could journey alongside them through the financial year; helping them to plan, record and control their business performance instead of turning up after the year end to carry out a largely valueless audit.

It isn't even as if we've much in the way of competition for business planning services. As Malcolm Palmer of A4G Software says, "Very few small businesses have any advisor other than their accountants, so we're in the perfect position to provide guidance.'

So what's stopping us from changing the focus of our client service delivery from backward looking reporting to forward thinking proactivity? It can't be that our clients don't want the change; ask a cross-section of your client base whether they'd like more regular contact and strategic advice and you're sure to get a large majority in favour. It can't be lack of skill or ability, especially when there are products like A4G's One-Hour Business Troubleshooter to help us.

Perhaps it's our fear of change that's holding us back. It can be strangely comforting to grumble about the continuing restrictions on small company audit work and the increasing burdens of regulation. Our challenge ' and I believe our responsibility ' is to see the positives and opportunities in the changing business landscape and to allow our own businesses to evolve accordingly.

Unless we recognise that our clients need proactive business planning and budgeting advice ' and make them want it from us' we may find that we outlive our usefulness to them. And I can't imagine it's very much fun to be told, 'You're fired!'

About the author
Amanda Fairclough is a north-west based chartered accountant, no longer officially 'young' by YCAG criteria, who has recently launched her own practice from scratch. To see where she's coming from, visit www.amandafairclough.co.uk

Do you want to edit AccountingWEB for a day?
If, like Amanda, you are interested in becoming a guest editor for the day, contact Community Manager Dawn-Marie Dart.

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Replies (14)

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By AnonymousUser
10th May 2005 22:39

over the top
Do we really need to go down the route of banks and building societies. Hey I'll do your accounts and by the way I do a nice line in cutlery!!!!!!!!!!!!!!!!!
In an attempt to find additional charges our financial institutions have lost their way. The profit they are making is over the top yet their service is appalling, but we have to use them.
Messrs. Major, Lawson and Brown have a lot to answer for.
Small business has become so complicated that a lot of good ideas never get developed. This will inevitably have an adverse effect on our economy.
Unfortunately there is little that is positive in our business environment and the nearer we get to the bottomless pit of European Federalism the worse it gets.
The real positive side is when your at the bottom the only way is up.

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By martinfoley07
11th May 2005 14:41

planning for SMEs - part 2
"SME" covers a multitude of sins, as some postings point out.
At one extreme, someone providing a job for themselves is an SME, but they may or may not want to build anything beyond that (in fact that applies to say at least a third?? or more??). That does not mean they don't benefit from planning rather than hoping, but it is de facto more difficult to persuade them they would benefit. And two hours spent helping them write the "right" piece of A4 can be invaluable.

At the other extreme, a start-up with big plans and big financial needs may well need a de facto outsourced FD, but unfortunatley will more likely find an outsourced FC from the ranks of most accountancy firms.

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By AnonymousUser
10th May 2005 11:54

Budgets, Business Plans & Management Systems
Early stage businesses take many forms but almost all of them lack a management system outside the heads of a few key people. An accountant in a position of trust should ask questions about the robustness of a client's business processes and identify vulnerabilities at which point implementing an ISO9001-compliant management system should be considered.

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By matthewleitch
10th May 2005 12:39

Flexibility and risk/uncertainty management
I agree with Martin Anderson. A budgetary control system with fixed targets and so on would be a waste of time for a small company. Actually it adds little if anything for a large company!

Control is vital but fixed targets in a fast moving world do not provide that control.

However, if by budgeting we just mean exploring the future by quantifying the financial implications of our current plans that is obviously useful information about feasibility.

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By robguy
10th May 2005 13:20

Small Co - Business Plans???
As a Fin Dir of 2 SME IT companies i couldn't agree more with Martin Anderson. Writing detailed Business plans - using 'Academic models' doesn't help develop and drive the business towards success. The time required on some of these plans can eat into quality management and almost 'de-focus' the Managemet team from running the business.

This may seem 'wrong' to achademics & students but pls belive me i have been in some very long winded meetings that talk about issues..... which never really come about!!!!

In my experience the senior management (usually the owners) know what they want, they know the market and can detail the Company objectives on a piece of A4 and then use their time in getting there..... instead of talking about how to get there!!!

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By AnonymousUser
10th May 2005 13:33

Business plan
Prior to the crash of the early nineties Accountants would grill their client for a couple of hours, put a business plan together, make an appointment with one of the local Bank MANAGERS who would ask the appropriate questions and then make a judgement. The client would would either be happy or go back to the drawing board.
I recently tried to get £30K for a start-up. After the bank saying yes in principle the risk assessors decided they needed a mound of information which led me to believe that they really did not want the business. This is not an isolated case. Banks these days require sucurity and to verify that the colour of your underpants is the RIGHT colour to make a decision. Funnily eneough you never can get to the person who makes that decision.
One wonders why the small business doesn't bother. They just want to get on with the job they are good at.

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By AnonymousUser
10th May 2005 13:33

Other requirements from accountants
Many small business proprietors need a little management accounting instruction before a financial business plan becomes useful.

Many fail to understand the implications of overheads on their business decisions. It is fine to say that they know what they want to do e.g. grow the business, expand customer base etc. but do they know what effect their proposed approach will have on the bottom line?

Proprietors generally have a range of prices/margins they are happy with. But they may not know the lowest that they could rationally go down to for individual transactions before these fail to contribute. As such, they cannot make fully informed decisions when chasing new or seeking to retain existing business. Alternatively, they may set prices too low to all customers. After overheads, they may not have the funds required to invest and therefore be unable to meet the demand created.

I have seen several proprietors surprised by a quick demonstration of the effect on the bottom line of a proposed decision. From "You will need to grow turnover by X percent to pay for the new office" to "cutting customer payment by 10% would save you £Y per year".

Plans are great and necessary to keep lenders happy, but what really counts is making rational decisions.

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By muganga
10th May 2005 11:27

Planning and Budgets
You're right that Accountants could help small businesses more, but be wary of getting too focused on planning and budgets. Most small businesses know where they want to go. They may not have worked out all the detail, but equally spending lots of time trying may be counter-productive.

My experience of small businesses (10 start ups) says that you need high level plans and budgets. But this is something that should take a few hours at most about four times a year. Flexibility is critical, it can make the difference between success and bankruptcy, so the plan is no more than an articulation of some useful thinking time, at a point in time. In most cases is not the thing that will determine how the business operates.

We don't really plan formally but about once every three months we broadly check whether we are in the right markets, have the right product, have enough resources and will have enough cash. If these all look right we knock up a little spreadsheet to record it. But when three days later a great opportunity/problem arises, we deal with that as best we can and the plan has very little direct effect. What does help is that we brought our minds together and know what we are trying to do and can measure everything on that basis.

That way we can spend nearly all our time (apart from the day a week lost to red tape) on running the business, being creative and looking after our customers.

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Dennis Howlett
By dahowlett
11th May 2005 12:00

who pays?
SME's find it hard enough to swallow the annual fee - at what point in their growth would they be prepared to pay for what amounts to an outsourced FD/CFO?

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By AnonymousUser
10th May 2005 14:55

Great comments - can you answer some more questions, please?
Thanks for the great comments, Chaps. I haven't read anything that I particularly disagree with and I think you've all made some very valid points.

If I'm summarising the debate correctly, we're in agreement that there ARE opportunities to provide proactive advice to small businesses, but that needn't over-emphasise planning and budgeting.

Which leads to some interesting questions:
What other services should we practitioners be promoting to our SME clients?
Can we generate an "eager want" for those services - and how?

Look forward to reading what you think...

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By martinfoley07
11th May 2005 14:27

"planning" for SMEs - part 1
Ignoring Jeff's ludicrous generalisations (no wonder the company he ran got into difficulties), I am surprised that many postings seem to assume that the phrases "plans" and "budgets" involve spending grillions of hours on enormous detail. Sounds like a stereotypical accountant view!!! (and bankers!!)

Who says this is apposite for most SMEs? HOWEVER, the fact that they should NOT in many cases does not imply a decent adviser can't add enormous value to many SMEs for small time inputs, thus enabling the exercise to be of great net benefit to the client.

The key point however is does the accountant have the requisite expertise, knowledge and skills? Some do, but I'm afraid very many more do not. This can be particularly stark at the small practitioner end, where quite often the only expertise is accounts preparation and tax planning/compliance. No shame if that's the case (it's called focus!!) but it is inevitably a dying market (and so it should be). Hence of course the debate. But accountants will have to change their learning and skill sets if they venture into these sorts of areas, and not merely provide technical inputs to long (or short) business plans/budgets (which is NOT a high value service either, by the way).

A 3 day course on strategic, marketing and operational planning techniques doesn't quite transform an accounts preparer or tax planner into a decent business adviser on these issues!!

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By AnonymousUser
10th May 2005 13:36

It's all a question of timing...
Our experience in starting a business in a new market very much supports the view that a start-up should be wary of focusing too much energy on planning and budgets. Instead, a venture’s early life is inevitably all about scrambling for customers, revenue and a market position while spending as little as possible.

A transition to a more traditional model, where planning and budgets suddenly make sense, will happen soon enough. Take marketing for example; after 5 years in business, we’ve largely done our experimenting and know what to expect in terms of a cost/lead from various marketing initiatives. For the first time, we have a marketing plan and budget that we feel confident will deliver predictable results. Bliss!

James B. MD Signifo Expenses

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By AnonymousUser
11th May 2005 09:10

Do you really want to help SME's?
The best thing accountants can do to help SME owners is to stay away as much as is possible.

Ask any SME owner to describe a thousand pounds and the answer will be either twenty fifty pound notes, or twenty hours of an employee'a time at fifty pounds an hour, or ten boxes of merchandise at one hundred pounds a time (or if he has been doing too much 24/7 a holiday).

Ask an accountant the same question and the answer is 1k, to be manipulated at will.


Couple this with the much needed optimism of an entreprenuer, and the pessimism of an accountant.

If accountants want to help SME owners, they need to change.

They also need to become much more ethical.

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By AnonymousUser
12th May 2005 09:11

motives
The reason why so much information is required by banks for start-ups and expansion is simply to see where opportunities are to sell their wares (life insurance, pensions etc.) They are not interested in the actuall business but only if the business can support their charges and fees. That is not a good basis for a relationship, which should last years, to be founded on.
Most Accountants are capable of putting a simple business plan together that should stand up to scrutiny. However that is not good eneough for todays Bankers because it doesn't show the opportunities for selling, nor should it.
Oh by the way Barclays are now selling clearly bookkeeping (a version of quick books) as part of their packages.

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