This article was first published in the April 2011 UK edition of Accounting and Business magazine.
Many sole practitioners are reviewing the way forward for their practice. In general terms, sole practitioners come in three flavours.
The first are those with fees up to about £100,000 in turnover, often working from a home environment, with little or no real overheads and making substantial net profits from their fees. The next group are those with fees from £100,000 to about £300,000, working from office premises and employing staff to help with accounts production. The third variety is quite rare. It is those sole practitioners who run businesses generating fees in excess of £300,000; usually over £500,000.
This category is unusual in that they have clearly addressed the problems facing most sole practitioners, and have overcome them. They have built regular businesses where delegation has taken place with regard to most of the activity. The owner is there to run the business and manage the day-to-day operation, as opposed to total hand-holding for the client.
The first two categories often face similar challenges and opportunities. Given the current economic climate, many firms are considering survival as the main objective, but as with all downturns, it also produces major opportunities. Those opportunities and challenges create the atmosphere in which practitioners can review the way the business operates.
Inside the practice the vast majority of sole practitioners handle all the face-to-face issues with their clients; they have support staff who may be dealing with payroll, VAT and general accounts production, but they are there only as a supporting act for the practitioner. Often there are one or two audits still being handled by the practice. Maybe this is the time to consider the way accounts are produced and audits managed.
With regard to the audit situation, there is now a major opportunity for this to be outsourced to a larger multi-partner firm by general agreement. That agreement means that the client remains a client of the sole practitioner, but the audit requirement is outsourced.
Maybe it is the time to review the general accounts production also. We have become increasingly aware that this function is often being outsourced abroad. There is no reason why it should not be outsourced in the UK. Many practices are now offering this service for the benefit of sole practitioners. We expect to see this function increase over the next few years. We believe that outsourcing to another regulated UK accountancy practice would give greater comfort to the sole practitioner.
The sole practitioner’s practice may not yet be ready to cut down on staff. Maybe this can be treated as a gradual and extended process. Naturally at the outset of looking down the route of outsourcing, there is little immediate value in retaining existing staff and paying for the cost of outsourcing. This would need a careful approach. As staff leave or retire, don’t replace them.
Savings that can be made in terms of fixed and variable overheads by outsourcing could be considerable. Office premises and staff are expensive. There are circumstances where sole practitioners have been moved into multi-partner firms and taken their client base with them. They have handed over all the production issues to the larger firm, and even some of their senior staff. They have remained there with a trading agreement, but ensuring that clients are happy.
But this is a normal precursor to retirement and under those circumstances we would expect to see a purchase agreement to be in place as well as the trading agreement. In this situation, it is possible to increase the profitability from the fees handled by the sole practitioner and reduce other commitments in terms of premises and staff.
Outsourcing can be considered on two levels. The first is to outsource abroad or to another firm. The second is to move the practice in its entirety into a larger multi-partner firm. The first option would be for a practitioner who wishes to increase his business without incurring major costs. The second facility of moving into a larger firm would normally be regarded as a forerunner to a retirement programme.
From an external point of view there will be increasing opportunities, given the ageing accountancy population, to make suitable acquisitions. Having reduced production costs, there is the opportunity to grow the practice by the purchase of fees, or entire practices.
It is an excellent route for expansion and, whilst the banks may not be so willing to fund substantial upfront monies for purchase, there are different ways of approaching the issue that can be attractive to both buyer and seller.
This year is certainly going to bring challenges to sole practitioners in terms of not only their own business, but also their clients. Most sole practitioners tend to look after a reasonable range of small businesses that also have generally one or two major clients. Businesses being looked after by the practice can be quite vulnerable when the economy is on the downward spiral.
Additional resources should be put in place to look after those clients who may need much closer attention in order to survive. Banks are currently unwilling to help with many small businesses, and the only support seems to come from HMRC accepting deferral of immediate tax payments.
We would, however, anticipate that during 2011 this may slow down, and maybe even cease all together. An additional burden is likely to therefore be placed on the sole practitioner’s client base, in terms of catching up with unpaid tax and coping with current demands.
The challenge for the sole practitioner, therefore, will be to spend more time helping the client, as opposed to just dealing with compliance issues. In reality, accounts production, PAYE, VAT etc are just a function.
The reality is that the client will be looking for personal input and personal support in order to survive. Anything that the practitioner can do to decrease his own time consumption in terms of accounts production and administration can only be of advantage to both the practitioner and the client in terms of time available.
To take a longer-term view, I would like to paint a brief picture of what a sole practitioner could well look like within a five-to-10-year time-frame.
The practitioner will work from home, or anywhere they care to be using a laptop. All accounts production will be outsourced. The practitioner will hand-hold the individual client and introduce them to suitable sources of finance, audit, financial services etc. The practitioner will be the guardian for the client – a practical business adviser who holds all the strings in one place on behalf of that client.
The traditional barrier of getting to about £250,000 in terms of turnover would easily be broken handling clients in this manner. The current problem is that the accountant is the bottleneck, as everything must finally go through them, with the practitioner having been responsible virtually for the total production of everything that goes out the door.
It has been the traditional ceiling that has stopped many practitioners growing any further. That barrier could easily be gone for the practice of the future. The big issue is getting from here to there.