The building blocks of accountancy

is for volatility ad variables

Julia Burn continues with her A-Z of top tips. This month she turns to ‘V’.

 

There definitely appears to be light at the end of a very long tunnel and, thankfully, the vaccine programme seems to be achieving the desired results and is allowing the country to re-open, albeit slowly and carefully. 

There is still a level of uncertainty in the economy while things start to get back to normal and this will inevitably create volatility for independent practitioners’ business finances where it is not possible to return to normal immediately.

To try to stabilise through this volatile time, it will be necessary to identify fixed and variable costs to ensure the business is as efficient and flexible as possible to react and deal with the inevitable fluctuations that it may encounter.

Fixed costs for a business are those that will remain the same and continue to be incurred no matter what the level of income that the business generates. For example, premises rent and rates, wages for salaried staff on an annual salary, and subscriptions to professional bodies required for you to continue your trade that are generally an annual charge rather than being based on your level of income.

Other payments which are not fixed but required to be made at set time frames are things like PAYE, National Insurance and corporation tax, which will be dependent on the levels of salaries paid and profits generating.

Contrastingly, variable costs change with the volume of income the business generates. For example, specialist services that are required to be bought in, light and heat costs and general equipment required to service your clients.

Reviewing costs

Many independent practitioners’ businesses will be reviewing their cost base and looking at ways they can change the nature of some of their expenses from fixed to variable. 

Businesses will be seeking to be more agile given the lessons of the pandemic and want to operate in a style which allows them to increase or decrease activity and costs at a moment’s notice.

It is likely that all our working lives will have changed with greater variability in working hours and practices. 

Therefore, businesses need to harness the best elements of how people have worked during the pandemic to be able to be both relevant for employees and accessible to clients. 

It appears unlikely we are simply going to go back to the way things were before, and ensuring businesses are agile and adaptable will be important to their success.  

In a volatile economy, it is important to try and ensure that the majority of costs are variable rather than fixed, as that will enable the business to flex costs to match the level of income generated, therefore minimising financial exposure by only incurring those costs directly linked to the income.

Record-keeping

The importance of timely record-keeping can not be underestimated. In a volatile economy, the most important factor will be the ability to react quickly to any changes.

To do this efficiently, records need to be updated on a live basis. It will also be essential to prepare a cash flow forecast which is flexed regularly to avoid unpleasant surprises.

Timing of cash flows will become ever more important, especially with the assistance packages offered by the Govern­ment during the pandemic now becoming payable, including any taxes which may have previously been deferred also becoming due for payment.

Many accountants offer an outsourcing service where they will effectively run your company’s accounting function for you. 

The service offered could include: 

 Maintaining the company’s book-keeping records; 

 Preparing monthly management accounts;

 Preparing and updating cash flow forecasts for you. 

These services will be more time-consuming for you to fulfil in a volatile economy, so outsourcing them will enable you to focus more of your time doing what you do best, looking after your clients, safe in the knowledge that your finances are being kept up to date.

The outlook looks promising, though, and fingers crossed, the new normal will settle quickly, allowing you to regenerate and get back to levels of income previously achieved.

Julia Burn (right) is a director at Blick Rothenberg and part of the team that advises medical practitioners

• See ‘“U” is for Unlocking’ 

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