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Stagnation casts gloom over accountants and SMEs

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As business inertia sets in, can the profession turn around the prospects of the backbone of the economy or will they have to hold out for a more significant event?

24th Aug 2023
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“We just need a significant event to make something happen because at the minute, it's just a constant spiral of negativity,” said Glenn Martin, the founder of Avery Martin, as he surveyed the current economic outlook for his clients.   

Life has mostly returned back to normal since the Covid lockdown was finally lifted at the start of 2022. But according to Martin, the lag from the pandemic has continued ever since and businesses haven’t had the chance to properly rebound. 

“We are still losing clients to insolvency who've gone through Covid, through all the lockdowns, but where they would have come back naturally, there's just been extra hurdles,” said Martin. 

Based in the north east of England, Martin said the acute impact of the cost of living crisis and high utility bills, driven by the conflict in Ukraine, has created a situation where restaurants can’t make the financial model work anymore. “You just can’t remodel a 400% increase in utility costs,” he said.  

Insolvencies, inflation and stagnation

Martin’s experience on the ground is now being played out in the national headlines. The collapse of high street staple Wilko earlier this month and the impending administration of the major construction company Buckingham Group reported at the end of last week are just two recent examples of the impact of stagnation in the economy.  

And while the drop in the number of corporate insolvencies in July compared to the previous month painted a somewhat positive picture, statistics for April to June revealed a more grim picture of the current landscape, with the 6,342 businesses going bust being the highest total since Q2 of 2009. 

Speaking on last week’s No Accounting for Taste podcast, Kirsty McGregor from Capitalise.com expects the “slow death” of insolvency will continue to increase, with small companies sharing the brunt of these problems as much as Wilko and Buckingham Group. 

“Demands for higher wages, inflation and general supply chain issues aren’t going to go away, this is kind of a new norm,” she said  

And dampening any celebrations from the Office of National Statistics report this week that core inflation in the UK has begun to fall in the past two months, McGregor said: “The fact that we're seeing inflation come down, doesn't mean costs are coming down, it just means the rate of the increase is slowing.” 

She added, “Although we're not technically in recession, we might as well have been for the last 12 months because everybody feels like they are and it's probably more damaging than a fast recession and a rebound.”

'It's just inertia'

Martin said those clients that limped through Covid would have normally come back by now but they haven’t and this negative spiral is stopping his practice from having a more forward looking viewpoint. 

“I want to just get going again and move forward, get a bit of momentum, get some good work in and get some good clients back through but we’re still tied to a few people we’re obligated to help,” he said. “At the minute, it’s just inertia.”

Normally a downturn creates opportunity, but the safety net of the Covid support schemes has delayed the rebirth of some businesses into a new restaurant or cafe, while high utility costs and high rent has prevented startups from coming through.  

This dire situation is not just reserved for brick and mortar businesses. E-commerce businesses, too, are also starting to see their golden era dim. According to Martin, these businesses had a captive audience during Covid, and reaped the benefits, but because the margins are so low, they need massive volumes to make a profit. 

From his experience, Martin guesstimated that e-commerce businesses have seen sales drop 20-30% since Covid and aren’t making much money anymore. 

Then there is the issue of directors. Three million self-employed taxpayers were excluded from Covid support during the lockdowns. Despite campaigns, such as the targeted income grant scheme, these taxpayers were not eligible for the self-employed income support scheme or equivalent support, and according to Martin, they’re still feeling the strain.    

“A lot of directors just had to take cash out of the business to survive, or run up loads of personal debt just to survive the period because they weren't supported individually,” he said. 

As a result, he said directors are carrying a lot of debt. Whereas they would normally put their head down and clear the debt, Martin said their personal expenses have gone through the roof due from mortgage, utility and food bills. “People are worried about dealing with short term challenges like heavy bills, as opposed to taking a chance in the business,” said Martin.  

What support can accountants provide?

McGregor agreed that business owners are tired and drew similarities between the current outlook for businesses and when Covid hit. And just like how accountants sprung into action during that crisis situation, McGregor said that the time has come for accountants to prop up their clients again. 

“Accountants are the ones that can provide that motivation, that hope, that confidence, by just having the conversations that their business owners might not be able to have with anyone else because they don't want to worry their family,” said McGregor. 

However, McGregor recognised that accountants are busy at the moment and it’s difficult for them to find more capacity, especially with the ongoing challenge of skills shortage sweeping through the profession, but she thinks - just like at the start of the Covid pandemic - they need to be having conversations with clients regularly. 

“Best practice is, of course, to get as much accounting data up-to-date as you can out to the client so that they can understand it, you can interpret it for them, and they can see where they're at currently, looking forward to projections and cashflow coming up, and then having those regular conversations: talk to us about how your cash flow is, let's do something about it before any crisis hits,” advised McGregor.  

“You're in a much more assured position if you can go to funders when you have got a stronger credit score or when you're not waiting to pay the wage bill next week or the VAT bill or whatever has suddenly appeared and you don't have the cash for it or suppliers pull their credit terms on you. 

“You don't want to be in those crisis situations because it immediately reduces the potential in the market for you to find further funds, whether that's external finance or whether it's opening up more supplier credit.”

McGregor, however, flagged on the podcast that unlike similar conversations at the start of Covid, these businesses are now into their overdraft and they’ve seen their cash balance disappear. She added: “Make sure as an accountant, you are really truly aware of the latest situation with your client and not thinking about what they were like three years ago.” 

Will this be enough?

However, the stagnant economy is making these conversations harder and accountants are handcuffed in what they can do to support clients. 

Martin said most of his clients are thinking more short term, with many holding back from making decisions to see what the economic climate looks like in six months time. 

“It's almost like everybody is looking for somebody else to take the first move and don't want to risk anything just now.” This means Martin can’t think longer term with his clients and a lot of his clients’ business plans are only 90 days ahead. 

He currently can’t see a light until a general election, a seismic Budget or some resolution to the war in Ukraine. But as things stand, “It's hard to say where the next bit of good news is coming from, really.”

Replies (1)

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By Nick Graves
25th Aug 2023 11:59

It's gonna take some serious Josef Schumpeteresque Creative Dezombiefication before one can talk of recovery.

It's not even begun yet...

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