Practice Survival by Barry Dacombe
The prospect of a Covid-induced recession means that many practices, big and small, will be concerned about the future of the practice as well as the future of the staff and contractors they employ. Getting a clear picture of this future is not at all simple.
Having experienced a number of past adverse trading conditions myself, I thought I might jot down a few notes recalling what actions we took during those times and how we planned a way forward that might be helpful to share it among those practitioners who are struggling to come to terms with the current situation.
I don’t profess to be an expert in this area of business advice so don’t treat this as expert advice. Your own accountant would be the proper source for such advice, but it helps to be prepared with good knowledge about your practice before you go there.
As Richard Harris advised in his 2020 NZIA webinar “Managing Practice Through Challenging Times” (available to NZIA members on the NZIA website under “….resources/seminar-resources”), “you must have a plan, by failing to plan, you plan to fail”. Many practices will, or should be, incorporated companies and as such the directors of such companies have particular duties under the Companies Act 1993 (reprinted 2020). Avoiding reckless trading is one of those duties.
A plan needs to be based on the best information you can get at the time.
Simply stated, you need to do your best assessment of the projects you have been commissioned to perform, assess the likely income you will receive from performing them, apply some risk mitigation factors, assess your likely expenses (excluding staff wages for now) and see how much of the cake is left to be distributed among you and your staff.
The following factors and comments will be of help.
Practice income comes from professional fees on projects able to be earned and then paid by clients in a timely manner.
Interrogate your project list to identify only the projects that have a realistic chance of proceeding and will result in income. This is not as difficult as it sounds but it does have to be done with rigour.
Apply a risk factor to account for possible delays, delays in getting paid and project default.
Place this income on a time graph extending initially for the next 3 months and then six months, nine months and twelve months.
Prepare a budget of expenses for both fixed expenses (rent, outgoings, insurances, IT support and software licences, etc) and variable expenses such as telephones, stationery and GST returns.
There are some concessions and support packages available from government which are entering the play so keep eyes and ears open to take advantage of them.
Speak to your landlord about rental payments and check your lease which may have concessions which apply if you have been shut out of your premises.
Also look at your own expenses as these will reduce, perhaps significantly, for both you and your staff if in lockdown.
Look at your projects, and if short of work, look at offering a cost recovery concession to those clients that may progress them at a lesser initial cost.
The resulting gross profit/time graph will establish how much money is available to fund the practice. How this is allocated among staff and principal(s) is up to you!