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The gap between firms will widen in 2014

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7th Jan 2014
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The gap between the successful and less successful UK accounting practices will get much wider in 2014, says Steve Pipe.

In many senses this is a “safe” prediction , since the gap has been widening in recent years anyway.  But there are also some particular reasons why 2014 will probably see an acceleration rather than merely a continuation of that trend.

Austerity will continue to change everything

The economic recovery is fragile and slow, and the need for many more years of austerity is an accepted fact. Life will continue to get tougher for clients due to a “perfect storm” of:

  • Prices increasing faster than earnings – leading to falling real incomes
  • Higher taxes – reducing real disposable income even further
  • Negative real interest rates – reducing the income and wealth of savers
  • Less generous pension arrangements – meaning shorter and less comfortable retirements
  • Cuts to services provided by the state – forcing us to start paying for things we used to get for “free”

This is precisely why the Chancellor warned that 2014 will be “a year of hard truths”.

And the hard truth for accountants is that all of the above means that clients will demand better value for money in 2014 than ever before.

Value can be defined by the equation:

VALUE = BENEFITS - PRICE

And that means that there are only four ways to provide better value for money.

You can be:

  • CHEAP = Provide the same benefits for a lower price
  • LITE = Reduce prices by more than you reduce benefits
  • BETTER = Provide more benefits for the same price
  • PREMIUM = Increase benefits by more than you increase prices

Some firms will fall behind because they refuse to do anything to provide better value for money.

Others will succeed in providing better value for money by cutting prices, by offering cheap or lite services. But many of those will still fall behind when their profits fall because they aren’t able to cut their costs far and fast enough to match their price cuts.

At the other end of the spectrum, some firms will succeed in providing more value for money by offering better or premium services. For example, they might do more to help their clients cope with austerity by providing:

  • Better decision support advice – so clients have the financial and non-financial information and analysis they need to make better decisions
  • Better business and commercial advice – so they use that better information and analysis to make better decisions that lead to better results eg improved sales, profits and cashflow.
  • Better tax planning – so they keep more of what they earn
  • Better financial planning – so their wealth is better protected and invested
  • Better retirement planning – so they can still enjoy the retirement they have always wanted

The profits of firms that provide that kind of better/premium service will be boosted in two main ways. Firstly, clients will gladly pay higher prices for services that help them get and keep more money. And secondly, clients will also end up buying more of these kind of services.

And as a result, the gap between those better/premium firms and the cheap/lite firms will widen in 2014.

In my opinion there are at least two other very specific reasons why the gap will widen even further over the next 12 months.

Clients are ready for the cloud, but many accountants aren’t!

According to Intuit’s November 2013 research, 88% of businesses now want their accountants to offer cloud based services, and 58% are willing to pay for them. However, currently only 37% of accountants are actually offering cloud based services.

Of course, cloud technology can be used to reduce costs and/or improve service.

So cheap/lite firms who do not embrace it will probably fall furthest behind. While better/premium firms who embrace the cloud fully will pull further ahead.

Auto enrolment

In my experience, only a handful of firms seem to be geared up to make the most of the huge commercial opportunity presented by auto enrolment.

Some firms have a plan for the technical aspects. Others believe IFAs will deal with it. But most seem to be completely missing the commercial opportunity.

Clients have no choice, they must deal with AE. It is a compulsory, and most of what needs doing can be done by accountants.

Those firms who capitalise on this new statutory opportunity and work out the best ways of pricing it, stand to earn substantial amounts of new income and profits. Those firms who don’t get their AE strategy right will see their income and profits lagging behind.

And if all of that wasn’t bad enough…

A widening of the gap between the ‘haves’ and ‘have-nots’ in the profession might not really matter if the gap were currently very small.

But sadly the evidence suggests that the gulf is already huge.

For example, when we ignore the large firms and look at recent research into independent UK practices, we can see that:

  • The top 25% earn per partner profits of more than £97,000, with the most successful earning well over £250,000. In contrast the bottom 25% earn less than £32,000
  • The most successful firms have continued to grow by 20% or more a year during the recession. While at the other end of the spectrum firms have been shrinking or going to the wall

Firms therefore have a clear choice.

Do the wrong things (or do nothing at all) and fall behind. Or do the right things and pull ahead.

Steve Pipe FCA is a leading strategist on the commercial issues and opportunities facing accountancy practices. You can spend a day with him for free or connect with him on LinkedIn.

Replies (8)

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By Sheepy306
08th Jan 2014 09:52

Would be interested to see that Intuit research and who was polled, 88% of clients want cloud based services from their accountants? I have a good quality client base but only 1 client who has any interest in the cloud. Just think what that % would have been without me and my clients, sorry Intuit.

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Nigel Harris
By Nigel Harris
08th Jan 2014 13:55

Intuit survey links

Our coverage of the survey Steve refers to is here and includes a link back to the full results.

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By amphur
08th Jan 2014 16:13

Cloud Software

Come off it Nigel, most clients wouldn't know cloud software from a spreadsheet. And if it's quality for money then most cloud bases software fall way short. Not having a contra account facility for example!!! 

 

Thanks (1)
Replying to atleastisoundknowledgable...:
Man of Kent
By Kent accountant
09th Jan 2014 11:30

Contra accounts

Eh?

Just set up a contra bank account easy peasy ;)

Thanks (0)
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By Sheepy306
08th Jan 2014 18:02

Transparency

Thanks for the link Nigel, I missed that article back in November.

I'm not convinced by those figures, had you polled the people attending the 'futureaccountant' conference then I'm sure you'd have got at least 88% support (infact I'd be worried if there was even 1 attendee that wasn't in full support) but I simply cannot believe that this is a random sample of owner managed businesses in the UK, it just seems rather convenient and way out of touch from my perspective and those gained from AWeb in general, which is a shame. I do still wonder exactly how the people were selected, it would be interesting and useful to know. There's always a risk to the reader when a firm pays another firm to tell them what they want to hear, although I'm not saying that's what has happened here.

It also never ceases to amaze me that a 'small' business can be one that has 250 employees! I realise that this isn't necessarily your definition.

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By mjshort
09th Jan 2014 14:42

A Pipe dream?

To be a 'most successful firm' I assume that you have to pay Steve Pipe & AVN money.

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By amphur
10th Jan 2014 11:22

EH

 

Ok so you have your dummy contra bank account. Now what about contra account. You know, the supplier that is also a customer and you counter one against the other. Quite easy when you know but hardy quick. First you have to set up a new customer and supplier making sure the names are slightly different. Then create a customer invoice. Customer> new invoice>receive payment> contra bank account>deposit. Then create a Supplier bill. Supplier>enter bill>pay one supplier>contra bank account. In a perfect world the contra bank account will balance at zero. It the real world they never do and the value of the invoice or bill will show a balance due which needs posting accordingly. As you say easy peasy.

 

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Man of Kent
By Kent accountant
10th Jan 2014 20:43

@amphur

Do really go to those lengths to deal with contra items?

Why?

Entries in the 'contra bank account' bank receipt and bank payment to contra off agreed amounts - job done.

No other entries needed.

I also think you're missing the point if you can't see cost and time savings associated with cloud software. 

Accountants can provide remote support throughout the year, user friendly dashboards geared towards the business owner not the accountant, automated bank feeds..

...the list goes on.

Plenty of clients are aware of the cloud software and do want to use it. 

Thanks (1)