There is a general misconception that our industry is recession-proof. This mindset holds that since everyone needs to file a tax return or have an audit done, accounting firms should always have revenue coming in.This is simply not true.
For nearly a decade, accounting firms have been greatly profiting from the country's favorable economic conditions. The last down market was more than 20 years ago, so many accounting firms and managing partners have not dealt with this kind of situation before. Are there things that firms should be looking for and reacting to?
Many accounting firms depend on transactions for a large percentage of their revenue. The expectation in an economic downturn is of a decrease in the number of transactions. Unfortunately, a recession results in business failures, unhealthy businesses and businesses looking to save money.
For us, these translate into lost clients and revenue, clients who are unable to pay or have difficulty paying for our services, and clients who decide to move down-market to find a less expensive alternative to our services.
All of these factors add up to an erosion in revenue base and cash collections for every accounting firm. The Big Four have been proactively addressing the economic downturn by rethinking hiring and, in some cases, by layoffs. Firms of all sizes should follow this example and examine their businesses during the next few months.
What are some of the initial steps that firms should take?
First and foremost, you should work on your 2009 budgeting process immediately. If you normally don't have a budgeting process, implement one. You should determine your projected situation for the next year as quickly as you can.
During your budgeting, you should plan for several revenue scenarios: no growth, a modest increase in growth, and a modest decline in revenue. Since we can't predict the future, these budgets should give guidance and areas that your firm needs to address depending on the scenario that actually occurs in 2009.
For most firms, labor costs are significant. What should you do in respect to labor?
It's important to communicate to your employees that the firm will be impacted by the economy. For the last six or seven years, accounting firms have paid significant increases to employees because of a labor shortage, members of the next generation looking for other opportunities, and general business success that translated into higher salaries.
Employees have now established an expectation level that can no longer be met. Fortunately, news about the downturn of the economy is no secret, and your employees should be receptive. Challenge your employees to find areas of the firm where expenses can be reduced.
When it comes to your labor costs, you need to closely examine your raises and your firm's hiring model. The high percentage of turnover that has become commonplace in this industry is coming to a grinding halt as employees find that there is nowhere to go once they leave. This will help firms with a reduction in the cost of hiring employees to replace ones who leave.
During the last few years, you might have found that your firm was not as selective as it could have been in terms of hiring. In very profitable times, we often find ourselves just trying to find enough hands to get the job done. When things slow down, it is time to re-evaluate and find areas of low productivity, to determine if experimentation in new service areas paid off, and to decide if your home office (support) staff is the appropriate size for your firm.
What should be done about the hiring of students and our relationship with colleges and universities?
Don't abandon your internship program. Students are relatively inexpensive, and it's important to maintain relationships with schools as a future source for potential full-time employees. In the Big Four firms, they have slowed their hiring but maintained their intern programs.
Be sure to have honest conversations with the professors at the schools to let them know your situation. They'll understand that you probably won't be hiring the same amount of students as in the past.
What are other areas to consider that could have a meaningful impact on the performance of the firm?
One important area is overhead expenses. It's easy to get into the habit of spending money when there is plenty of it coming in. Now we have to take a step back and examine our areas of spending and find ways to control them. Some examples of areas to cut could include continuing education outside of the office or region, marketing expenses, employee welfare budgets, insurance policies (raising deductibles), or even lowering office thermostats by a degree or two.
Comb through your income statement line by line to find areas where you can afford to cut back. A 1 percent savings in a $10 million firm is still $100,000, not an amount to take for granted. Be sure to closely examine things that you haven't thought about for a while to see if you can find cost savings.
Operationally, it is crucial that we be as efficient as possible. Communicate with your staff from top to bottom that you can't afford to have realization and utilization issues - make them accountable.
Is there anything else that could significantly hurt our firm that we should consider?
The adage "Cash is king" should be foremost in your thoughts. As we gear up for busy season, we enter a period of huge risk. We perform a great deal of work for our clients, continuing to pay our employees and our expenses while borrowing money that we expect to get back at the end of busy season. If we find out at the end that a client is unable to pay, it also affects our ability to pay back the money we have borrowed.
We need to be very careful about our client selection. Our employees should be assessing the situation of each client in respect to their ability to pay their bills. This might be the right time to consider implementing a client payment program, as some firms are doing. For example, you might decide to require a third of the payment at the start of the audit, a third halfway through, and a third at the end, with a stipulation that work can be ended for non-payment.
Are there any silver linings or opportunities?
If you believe everything that I've said already, you should know that a recession is a good time for a business to get its house in order. It is a time to analyze expenses, examine employee performance, and right any wrongs.
We will all be finding that many clients will be moving down-market to try to reduce costs. Clients trickled down from the Big Four to smaller firms, and this will be happening again. Clients will find that smaller firms will charge 30 to 40 percent less than the Big Four, so we will be able to pick up some of these clients.
Try to find ways to help your smaller clients who might be looking to leave. See if there is anything that you can do to help them save money in other ways so that they can afford to remain with your firm.
While it will take a great deal of fortitude, now is the time to exchange members of your staff for others in the marketplace. You can upgrade the talent in your firm from the large selection of potential employees.
Finally, while a recession is usually the time to cut back, you might find that a downturn in the economy is a good time to make very strategic expansions. This strategy, best displayed by Arthur Andersen in the 1980s, can result in new partners, new service areas or expanding into unsettled markets.
Gary Shamis is managing director of Cleveland-based SS&G Financial Services and a member of The Advisory Board.
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