Accountants have closed their 2020 books with relief. It’s not hard to see why. It was the year a once-in-a-century global pandemic scrambled their firms, client relationships, workflow and personal lives. But the good news is the vast majority of accounting companies weathered the initial months of the crisis reasonably well.
Since then, many firms have changed where and how they perform their duties. Plus, as essential workers, they have pulled out the stops to help their clients respond to the financial losses that government lock downs precipitated.
But that was then. Today, while you wait for the U.S. vaccination effort to pick up speed, are you wondering how 2021 will unfold? Will it represent a return to normal or will it produce a “new normal,” in which the changes you implemented during the crisis will become permanent? Many industry observers think the accounting business will never be the same and that 2021 will continue to pose significant risks to the industry.
Three risks, in particular, are likely to remain acute throughout 2021:
- Loss of revenue
- Client financial difficulties
- Challenges of remote work, especially remote audits and cybersecurity.
Read on for guidance on the first two of these issues. In Part 2 of this series, we will address the risk of doing accounting work remotely.
Accounting Firm Financial Challenges
Since the vaccination rollout has been less than smooth and since COVID-19 variants threaten to delay development of herd immunity, the 2021 financial outlook for accounting firms is uncertain. For this reason, be prepared for further rounds of expense reduction and/or revenue replacement.
Guidepost #1. Reduce your “bricks-and-mortar” footprint. In 2020, you likely transitioned all or most of your employees to virtual locations. If that worked well, you may have already reevaluated your office-space needs and moved into smaller quarters. If you postponed doing that and 2021 becomes more challenging, this might be the year to make a long-term commitment to remote work and to reduce your leased office space.
Guidepost #2. Accelerate transition to cloud-based work. The pandemic made clear that you and your staff must be equipped to provide continuous client service from anywhere in the U.S or world. Adopting cloud-based technologies is a key part of this effort. Firms that made the cloud transition prior to the pandemic had a much easier time weathering the crisis than those that didn’t. “You need to be 100% in the cloud,” recommends Jim Bourke, a CPA and partner and managing director of advisory services at Withum, an accounting firm with 20 offices and 1,300 employees. Making that shift provides additional flexibility for home-based accounting staff in the event they lose power there. With cloud apps, they can seamlessly continue working from any location that has power and internet access.
Guidepost #3. Make judicious expense cuts. Slashing your expense budget is not a good idea. There’s a fine line between achieving financial relief from lower expenses today and creating revenue shortfalls due to future resource shortages. When considering whether or not to reduce an expense, determine whether the item is essential to produce current or future growth or whether it’s extraneous. For example, in the marketing arena, you might be able to justify cutting a brand-building tactic, but not a lead-generation one. The former will likely not have a direct relationship with revenue, while the latter may be directly linked to generation of leads and sales. Eliminate sales-related expenses at your future peril. Do a similar analysis before laying off staff. Reducing head count will most likely reduce expenses short term, but may produce deleterious long-term results. For example, layoff costs (severance, offboarding, etc.) may eat into your salary savings. And forcing remaining staff to pick up the slack may lead to lower productivity, burnout and resignations. The point is, reducing expenses should be measured and focused, not indiscriminate.
Guidepost #4.Think strategically about how to lead your firm out of the pandemic. There’s a natural tendency to hunker down during a crisis and emerge cautiously once the coast is clear. Experts suggest this might not be the optimal approach. A Harvard Business Review article explains how companies using what the authors call prevention strategies (laying off employees, increasing operational efficiency) and promotion strategies (growing their markets, investing in the business) were more likely to emerge strongly from a recession. In fact, according to the authors—Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen—a combination of these strategies produced the best three-year compound annual growth rate for both sales and EBITDA growth. However, companies that relied on prevention strategies alone lagged behind their bolder peers.
Guidepost #5. Consider lessons learned and opportunities to reimagine your firm. Tom Hood, CPA, CEO of the Maryland Association of CPAs and of its Business Learning Institute, advises accountants to expect significant changes in almost every structure they knew before the pandemic, including taxes and regulations in most industries. “Some will become permanent and some will fade away,” he says. “The leaders’ job will be to continue shaping their organizations through a constant iteration of redefining and reinventing . . . as the pandemic fog clears.”
Client Financial Distress
Covid-19 epidemic has had a catastrophic impact on America’s small businesses. In fact, according to a Yelp economic analysis, about 163,000 small firms closed either temporarily or permanently by August 31, 2020 due to the pandemic. As government restrictions continued for months, those numbers likely grew through year-end 2020 and beyond.
Accountants have seen countless clients suffer financial distress because of the pandemic. But more are likely to occur during 2021.
Guidepost #6. Watch for signs of financial stress. All clients have occasional rough patches. But when they suffer difficulty along many fronts and for a long time, it may be time for you to offer assistance. Here are some warning signs to watch for:
- Cash flow problems—Periodic cash shortages that become persistent are a financial red flag.
- Difficulty paying taxes—Clients that fall behind on their federal and state tax remittances may need your help avoiding additional fees or even potential criminal liability.
- Mounting customer complaints—Small businesses short on cash may have to lay off workers or cut back on customer service. When satisfaction numbers tank and negative reviews soar as a result, that’s an ominous sign.
- Deteriorating assets—Firms that reduce their investment in physical or manufacturing assets may create brand problems that eventually hurt sales and company reputation.
- Bad bookkeeping—A financially struggling company will often have inadequate bookkeeping. This makes it difficult to know its true financial health and may lead to checking account overdrafts and other problems. Too many overdraft charges can have downstream effects such as late payments.
- Missing owners—The owners or executives of a failing firm often “hide out.” They start ducking creditor calls and avoiding their lawyers and accountants. The more they’re “no show,” the lower employee morale will sink and the further their financial problems will compound.
- Worsening creditor/vendor relationships—As owners have mounting trouble staying current with their bills, the companies they deal with will begin to lose faith in them. As the owners rebuff repeated efforts to receive payment, their relationships with key lenders and suppliers will suffer.
- Not paying employees—As distressed companies enter their final laps, they will be unable to pay their workers. This will create huge reputational issues and payroll tax liabilities and penalties down the road.
- Legal nightmares—As above problems unfold, creditors, vendors, employees and others will likely seek legal redress. This will likely nudge failing companies into insolvency. But it’s not a preordained future. When their accountants get involved, it can spell the difference between liquidation and a potential return to financial viability.
Guidepost #7. Help your clients navigate the pandemic. You are well positioned to render assistance to financially distressed clients. The type of assistance you can provide is varied, depending on the nature of the client. For example, if you have a lot of restaurants or breweries as clients, you can help them assess the financial impact of reducing internal seating capacity or of expanding outdoor dining. You might help them seek local regulatory flexibility to reconfigure their business to boost income. If and when government assistance programs return, you can assist small business in any industry with applying for government loans and grants. The point is, the opportunity to apply your accounting and financial smarts to your clients’ pandemic struggles is almost unlimited.
Guidepost #8. Encourage your financial distressed clients to pay you.
Even in the best of times, some of your clients will either be late to pay you or they may never pay. During the pandemic, this problem has become more acute. But it doesn’t have to be insurmountable. Here are some steps you can take to receive what you’re owed.
- First, before taking on any new engagements, see if the client will agree to shorter payment terms. Also, break large projects into smaller pieces to allow for more frequent billing.
- Second, get personal when invoices become delinquent. Don’t just send another balance-due invoice. Get on the phone and touch base personally. The goal isn’t to just remind them of their obligations, but also to do fact-finding on why they’re late. This insight will not only help guide your future efforts to get paid (if necessary), but it will also suggest other avenues of working together in the future (assuming they pay up).
- Third, during your engagements, watch for the red flags we mentioned earlier. If you suspect a bankruptcy filing is in the offing, submit invoices for completed work as soon as possible. That’s because payments within 90 days of a bankruptcy filing will generally be considered preferential. This means the bankruptcy trustee may come after you for repayment.
- Fourth, if the client requests a discount or revision of payment terms, consider the benefits of showing flexibility. But be sure to document the change in an amended engagement letter or agreement.
Finally, although it may be tempting to sue a client for a bill that’s long overdue, consider the downside. Clients may respond with a countersuit for malpractice. Think about whether the benefits of receiving payment are worth the headaches of getting ensnared in malpractice litigation. Even though your professional liability insurance will likely cover your legal expenses, wouldn’t you rather spend your time on more productive matters?
For guideposts on handling the risks of remote accounting, including cybersecurity and auditing issues, check out Part 2 of this series.
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