When the going gets tough, the tough get going

Volatility is here to stay, so how can we stay on track?

Some time back, we warned about the serious momentum building in inflationary pressures in many of the world’s top economies. We don’t like to say “we told you so”, but the warning signs were there and have now come to fruition in many countries. The US, UK and Australia have seen rising prices brought about by a combination of money printing at the Central Government level, as well as supply side shocks caused by the Covid pandemic and shutdown of much of the world’s economy. Add to this the war in Ukraine, and voila, we have a mirky economic soup. In order to try to control rising inflation, Central Banks, which are often independent of national governments have very few levers to try to crush inflation. The main one of course being an increase in interest rates.

Global economic pressures building

This is where the soup gets murkier. Over the past 15 years, and since the GFC, central bank interest rates have been at historically low levels, and close to 0% in many countries. This has resulted in people in these countries getting used to a very low cost of borrowing, allowing both personal and central Government debt to increase over this time. Our thoughts are that with historical interest rates generally tending to be averaging at around 7.5% over the last 100 or so, banking on near zero rates is always going to be a recipe for disaster. With the latest interest rate rise, and incidentally, an almost unprecedented set of consecutive rises in many economies, the vice is starting to squeeze spending. Here in Australia for example, house prices have risen dramatically over the past 10 years, meaning higher and higher mortgages. With increasing interest rates, although not reflected in official figures yet, this will mean a downturn in economic activity. Anecdotally, we have spoken with many businesses recently, and they have all said the same thing, that since January this year, revenues have reduced. And in some cases, quite significantly compared to last year’s levels. Now what does this mean for the remainder of the year? It is also evident that a significant proportion of fixed rate mortgages come to an end this July, and to be superseded by variable rate mortgages, and therefore much higher repayments. Couple with this the increases in energy costs (don’t get us started on the possible reasons for this, but they do seem to stem from supply, or lack of it, and much of it is self-inflicted!) and the situation is only likely to get worse.

What will this mean to businesses?

What this will mean for many businesses, is a downturn in revenues, increase in borrowing costs, and an increase in expenditures. It will probably increase bad debt levels and costs of debt recovery too. The problems mounting for your SME clients could be a major problem over the next 12 months.  Now, what does this mean for both them, and you, as their key financial contact? Firstly, many of your clients are going to be going through severe distress and anxiety, as for many, the walls may be closing in on their business. According to a University of Bristol study a few years back, this can lead to unwelcome problems at the personal, family, and wider societal level. They will be undergoing panic as options for their business longevity start to reduce. There is nothing worse than this feeling of hopelessness and despair. We believe that accountants and advisors have a key role to play in reducing this on behalf of their clients, by clearly providing the options available to them to deal with the situation they may find themselves in.

What will this mean to accountants and advisors?

For you, their advisors, this may also mean that your focus may need to shift from their traditional tax and compliance work, to that of their advisor. Yes, there are often Government schemes giving access to business advice for SMEs, but this is often generic, and also, does not make the owner or director accountable for executing that advice. This is all very well, but it’s unlikely you’ll have the time to analyse, in detail, the financial performance and health of a business. Nor provide the strategic and tactical advice they are likely to need to be able to steer their way out of the situation. Such analysis and advice requires data, and lots of it. Or, at least, this has historically been the case. This is often difficult to bill, from both a value and a client’s ability to pay perspective. Creating reports about general profitability is reasonably straightforward, but what about the underlying drivers of profitability? More important in these times, is the reporting of the cashflow situation, as well as sources and efficiency in the collection of monies owed.

Gaps in client needs, and advisor capabilities

Not so long ago, Xero published a survey of SMEs and one of the key concerns of those businesses (56% stated they were concerned), was the fact they weren’t getting the strategic advice they needed to be successful from their accountant. On working with many practices in the past few years, the availability of capacity and time is certainly one of the main constraints. Equally, there seems to be limited access to simple and fast reporting and projection applications. We still hear how time consuming many forecasting and reporting tools can be.

The Inflationary Paradox

Another potential constraint we are aware of, is that businesses can be unwilling to pay for such advice. This brings up two areas of concern. Firstly, with the change in economic conditions, attitudes are likely to change. Equally, the value question changes when faced with the choice of losing everything an entrepreneur has created versus getting the advice they need to turn the situation around or even sell the business. We all know what the preferable outcome would be. Secondly, the cost of the advice an accountant provides. Therefore, the big question is whether or not your practice needs to re-examine its advisory business model. Are there innovative technologies that you can utilise that may mean the cost of your advice is more readily available and acceptable? Another area to consider is that of being structured correctly for advisory. Our director, Mark Holton, and Smithink, has written extensively on the need to restructure, specifically for advisory services. Even in an era of poor recruitment into the profession, they believe this is not insurmountable.

The tide is changing, will you ride the wave?

With the economic conditions around the world worsening, and risk of downturn increasing, this will increase the risk of financial poor performance or distress for many small and medium businesses. They will need help, advice and guidance in order to navigate these times well. As their accountant, it is partially your responsibility to be able to provide this advice. There are barriers to this, but these can be overcome with the scalable business reporting and forecasting tools, designed to be deployed quickly to provide immediate insights. These tools, such as Jazoodle, can fulfil many of the business performance, health reporting and data needs of SMEs, and therefore can easily help overcome these challenges. Insights are now available in an instant, along with the revenues that the advice could to

Andrew Paton-Smith

Andrew Paton-Smith is the co-founder and CEO of Jazoodle, a simple but very powerful and innovative business reporting, health monitoring and valuation application. This will also soon include scenario modelling and cashflow forecasting, that promises to enable scale in the provision of business advisory data analysis and insight for accountants and advisors. If you’d like to find out more contact us here