As part of my Chairman’s Address this month, I wanted to take this opportunity to share my thoughts on the Professional Services industry and the current business factors impacting those within the sector and of a similar nature.
A 2017 Australian Financial Review article reasoned that Australia was fast-becoming a Professional Services nation – with the sector often reflecting the greater business sentiment found across a broad range of industries.
I believe this is especially true now, and although the first two points contained within this article directly pertain to Professional Services Businesses (PSBs), the remaining will be of equal interest to the greater business landscape.
In writing these, I have looked to link my opinions to not only appeal to those within the industry, but to also consider clients of PSBs, providing some universal point of interest for all business leaders and management teams.
What is Impacting Professional Services Businesses?
Whilst there is plenty of research highlighting what is impacting the Professional Services sector as a whole, from a day-to-day perspective, below is what I believe are issues for PSBs. It is not an exhaustive list and different industries, and different sized Firms will have more or less of these items on their stress lists.
Each listed below are equally important and none sits above the other – therefore I have not given any order of priority to the following:
- PSI Profit Allocation
- S100A Trust Reimbursement Arrangements
- Staff Skill Shortage
- Inflation / Interest Rate Rises
- Macro & Micro Impact on Client Base
- Plenty of Work - Is it all Profitable?
- Cashflow & Debtors
PSI Profit Allocation
This is a piece of new legislation which covers what Partners in PSBs can earn and then distribute among family members and associated entities.
The ATO has recently released guidelines around what they consider to be Low Risk, Moderate Risk, and High Risk in relation to Profit Allocation. Some individuals have the FY23 to sort out their structures and distribution calculations before the ATO starts compliance in this area.
However, the planning and making sure that the risk level is contained in either the Green or Amber categories needs to start now.
As this legislation evolves around the level of tax a family group will pay, it is quite topical and front of mind for some partners.
For a more in-depth discussion and analysis, please refer to our recent Insights article - blog.agredshaw.com.au.
S100A Trust Reimbursement Arrangements
We wrote an introductory article on this as part of March Insights Newsletter, however ‘S100A Trust Reimbursement Arrangements’ is another new piece of legislation (or updated version of old legislation) taking effect and focuses on how the ATO will interpret distributions from Trusts to beneficiaries – both individual and corporate.
It is a political hot potato at the moment and there is an ongoing legal case surrounding this area of law, so watch this space.
In essence, the legislation surrounds whether the distributions are commercial and are “benefiting” the intended beneficiaries, or the distributions and associated monies are being used for the benefit of higher tax-paying individuals and not the stated beneficiaries.
There are guidelines and risk levels established by the ATO which can be used by taxpayers when deciding on distributions from their discretionary trusts.
Keep an eye on the AGR website and Newsletter in September for an extended overview of the S100A legislation revision.
Staff Skill Shortage
This area of concern is not just a problem for Professional Services Businesses but is nationwide and impacting multiple industries.
The most recent Australian Bureau of Statistics Business Sentiments data seconds this train of thought, highlighting that one-third of employing businesses are having difficulty finding staff – a sentiment which was also shared across January, March, and April this year.
Certainly, the fight for talent is red hot in the accounting space and from discussions with referral sources and clients, it is also common within other Professional Services industries.
It is very difficult to grow and be client-service centric if team members cannot be found with the right cultural fit and skillset. High-quality team members are receiving interest from all sources and head-hunters, so looking after the needs of our team members is a high agenda item for all PSBs.
Inflation / Interest Rate Rises
As the stubbornness of inflation continues to attract the media attention and our hip pockets, the impact that inflation has on our client’s bottom-line as well as our own bottom-line starts to take up thinking time. Add to this the cost of keeping or acquiring talent, then the margins of a PSB can contract quite quickly.
Alongside the natural price rises caused by inflation (rent, wages, general expenses, food, fuel etc), Central Banks are starting to increase Interest Rates to combat the inflation number. The increase cost of debt will impact businesses and households alike, so to some degree the transitory inflation argument has the risk of becoming permanent in nature.
Importantly, business decision makers need to discuss and execute on price rises - whether that be hourly rates of team members or other service/product line price structures, to maintain profitability.
The discussion with clients and customers around these price rises is equally important and needs to be undertaken sooner rather than later. We are seeing clients needing to increase their prices to combat supply-chain issues, lack of staff, and the general cost of doing business.
The interest rate rises have not stopped yet, so the impact on discretionary spending and mortgage repayments for clients and team members has become a regular topic for conversation around the office as well.
Plenty of Work - Is it All Profitable?
Regardless of who you talk to, everyone is so busy. Speaking with clients and referral partners – nobody can remember the last time they worked so hard. The effort is certainly there from everyone, but is the profit?
The media has covered the tourism impact of closed boarders, the restaurants being impacted by the lack of backpackers and/or qualified staff, the food industry being impacted by weather events and various diseases, and of course, the building and construction industry problems caused by supply chain issues, material cost increases and staffing concerns.
All are major industries for Australia and all working very hard for very little. This spreads throughout other industries at a vertical or horizontal level as time passes - impacting further into other service industries and the minds of the consumer.
Taking on additional clients or ramping up production for products for little margin or in some cases no margin just to win a job or reach a KPI for new client introductions makes no sense.
One of the most valuable resources an individual has is time. Do not waste it – you only live once.
Macro & Micro Impacts on Client Base
As a PSB what impacts our business invariable impacts our client base as well. Some micro issues in an industry or supply chain component may be specific to an individual client, but the macro issues certainly spread across the whole client base.
I have mentioned the effect of interest rates and inflation, talent retention and acquisition, cashflow and debtors, all impacting across our businesses and client base.
Talking to clients and reviewing strategies around marketing, product/service lines, cashflow and debtor programs is very important now (more so than ever). Being in front of the curve will allow for better execution of a cost-out strategy or an alterative growth strategy then the “wait & see” what happens approach.
Cashflow & Debtors
Having to pay more for inputs and not necessarily being able to pass on all outputs, can lead to margin squeeze and cashflow difficulties.
It is very important for PSBs, Partner/Directors of PSBs, and the clients of those to monitor the effect on cashflow of these input cost rises. Having timely and accurate reporting data will be essential in monitoring margins and cashflow.
In addition, Debtors need to be tightly managed. Likewise, having the conversation early with clients about payment terms, repayment schedules or other financing alternatives is both proactive and a necessity. Debtors on a Balance Sheet may be recorded as a current asset, but a Debtor balance cannot pay staff, rent or the mortgage. Debtors are not an ideal asset nor a long-term asset of a business. Debtors need to be converted to cash as soon as possible.
With all the supply chain issues of the past couple of years, managing inventory will be another high priority area for management to address. Having too much inventory, or the wrong inventory as the economic cycle turns may well harm businesses profitability and cashflow.
In the current reporting season in the USA, we saw Walmart and Target discuss the issue around too much inventory and having the wrong inventory as it was late arriving for customers. It may be wise to take those two major US companies as the canary in the coal mine and revisit your strategy around inventory and inventory levels.
There is a lot to consider here, but again it is timely and relevant regardless of which industry you operate within. In reviewing these points and placing mitigation strategies early, you may save yourself hassle across the long-term.
Whether or not you are a Professional Services business, the Archer Gowland Redshaw team are here to support you and advise where necessary on each of the above. Should you require assistance at any time, please feel free to contact our office on (07) 3002 2699 or info@agredshaw.com.au.
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