Are tax, VAT bills and Professional Indemnity Insurance (PII) putting cash flow pressures on your business?
The UK Productivity tracker by PwC
The answer could lie in the way you finance your IT.
Over the last few years we have talked about the clear blue water between the Top 10 firms and the rest of the sector. This has grown to such an extent that average UK net profit margins for the Top 10 are now over 14 percentage points higher than the Top 11-25.
PWC annual survey
PWC’s recent survey of professional services firms illustrates the widening gap between the top 10 law firms and the rest. Top 10 firms enjoy significantly better margins than the rest of the top 100, and when it comes to spending power, the gap is increasing.
Unpredictable cash flow
Cash flow can be unpredictable for all professional services firms, whether within the law sector, accountancy and taxation, or creative services, with variable client billing delays and discrepancies, as well as yearly tax bills to cope with. The financial ups and downs are simply more manageable for larger, more successful firms with access to more working capital. Other organisations can struggle, with potentially serious consequences according to PWC:
Almost one third of firms outside the Top 10 recorded net profit margins of less than 20% with a number now close to single digit margins. Our view is that unless these firms can radically restructure their business, their short- to medium- term survival must be in doubt.
How can firms achieve greater spending stability?
Every business wants to minimise the impact of tax bills and other significant outgoings, and many professional services firms are looking towards leasing as a way to improve cash flow without having to forego investment in fee-earning staff and infrastructure.
Leasing assets rather than funding them upfront can help preserve cash in the business that can be invested to fuel growth and customer retention.
For example, we enabled Chantrey Vellacott, a long-established accountancy firm, to replenish its depleted cash reserves after it had invested a substantial amount of cash in an IT infrastructure refresh. By implementing a ‘sale and leaseback’ agreement, we were able to buy all of the firm’s IT assets (up to one year old) and lease them back over an agreed period. This arrangement works so well for the firm that it continues to fund IT upgrades this way, year after year. The flexible approach allows Chantrey Vellacott to react to changing business needs.
Achieving a steadier cash flow can put all professional services firms on an even playing field, more able to compete with larger competitors, who themselves achieve greater profits through using their working capital to invest in fee-earning activities.
