Understanding Enterprise

Entrepreneurship and Small Business, fourth edition

by Simon Bridge and Ken O'Neill

Case study: chapter 6

Return to full list of case studies.

123 Accounting has been trading for 15 years and, despite having what used to be a relatively steady customer base, the business has not grown at the rate the owner had anticipated. Read the following case study and try and determine the constraints on growth that the business is facing.

Paul has been running an accountancy practice in Galway City for the past 15 years. He employs a secretary, Anne, who deals with general administration duties and a trainee accountant, David, whose role is mainly concerned with preparing bank reconciliations, acquiring documents from clients and assisting Paul on audits. The firm was at one time one of the most successful in the county when Paul actually had to turn away prospective clients due to the significant workload already on his books. Today it is a significantly different story. This once large client base had consisted mainly of family businesses although it appeared that this category of client was contributing less and less to the business's overall revenue streams which had been in a steady decline over the past few years. Having always been more comfortable with the accounting side of the business, Paul asked David to investigate the marketplace and devise a strategy that they could implement in order to grow the business back to its previous position and beyond. David duly did so and reported back the following.

For many businesses, 2008 signalled a turning point in their fortunes. Access to capital that had been so readily available in the past had become increasingly hard to secure which left many businesses, small and large alike, facing difficulties settling both their short-and long-term obligations. Faced with this scenario many organisations were confronted with the dilemma of both cutting costs and increasing efficiencies in their operations or thickening their revenue streams by securing more new business - a daunting task in a recession. The majority of both multi-nationals and local business alike decided upon the former option and as a result many of the leading accounting firms went through the painful process of making many experienced staff redundant. This group of individuals faced an uncertain future. While their experience would certainly benefit any company that could employ them, their age, combined with the cost of their salaries, put many off the prospect of hiring them and as a result many of them had to consider self-employment.

For enterprises such as one-man sole traders, making redundancies was obviously not an option and, as a result, many had to become creative in their cost-cutting exercises. One example of this was local taxi drivers, classified as self-employed, had grouped together and paid for a number of colleagues to enrol on a bookkeeping course. It would allow them to complete VAT returns and income tax returns for the entire depot in exchange for other members paying for their petrol for the month. Other small businesses also looked at ways to reduce their expenses and, as a result, many business owners employed the service of the new accounting franchise models that were beginning to appear in the region. This franchise model allowed newly qualified accountants to set up a firm and prepare accounts, complete VAT returns, manage payrolls and submit tax returns for clients with the support of headquarters based in Dublin. In order to maximise market penetration, the franchises were undercutting the cost of many of the traditional accountants and, in certain cases, could offer up-front quotes rather than invoicing for time spent on a job afterwards.

The profitability of the majority of Paul's clients had been in decline over a number of years which had led many to seriously question the viability of their businesses. Many businesses that had been in the family for generations had ceased trading as their owners approached the age of retirement. The next generation could not justify the effort when comparing it to the decreasing rewards. Instead they preferred to compete in the labour market for a risk-free salary working for someone else rather than the uncertain income from self-employment. This was not an easy task however as family-run businesses were not the only type to be suffering. Indeed businesses from high street retailers to nation-wide manufacturing firms were seeing profit margins squeezed to the extent that some had to be declared insolvent. Of those that were surviving, they had begun to carry out more of the accounting functions in-house, among other things, in an effort to minimise costs. On the other hand there were a number of opportunities upon which firms could capitalize - the main one being to offer an insolvency service.

In order to offer an insolvency service a firm must have a qualified insolvency practitioner which unfortunately Paul was not - so the only option would be to recruit from outside the firm. Although there had been a demand for such a service, it was traditionally practised by only a few firms that specialised in the service and there was not an abundance of practitioners interested in moving to a small firm in Galway. In addition to the difficulties that may be faced in recruiting an insolvency practitioner, there were also potential problems in hiring trainee accountants. A shortage in the marketplace was beginning to appear as more and more trainees were being seduced by the possibility of higher wages and a warmer climate in Australia that was experiencing a shortage in the profession itself. This was a trend that had been experienced by the engineering industry years before and with students being bombarded by promotional literature in careers fairs across the country, it was the turn of the accounting industry now. The consequence of this was that as larger businesses shopped around for competitive accounting services, any firm unable to recruit an adequate number of staff to assist on jobs would potentially miss out on some lucrative opportunities.

Suggested solution

Increasing competition

  • Redundancies made by the big four has led to many experienced accountants starting up by themselves rather than applying for jobs in an increasingly competitive job market
  • A new franchise model of accounting has made access to the market easier for many who can undercut the prices of 123 Accounting
  • More sectors such as taxi drivers are appointing one member of the depot to calculate VAT returns at a more competitive price. This combines with many clients attempting to carry out their own bookkeeping in order to cut down on costs.

Overall growth of market demand

  • Through decline in the traditional customer base, many family businesses were becoming unviable, as a result of which many of the next generation had to seek employment elsewhere
  • In addition to Howard's traditional customer base shrinking, the overall market showed a similar trend as more and more businesses closed leading to increased competition for work
  • The potential market was shrinking as more and more businesses were declared insolvent and those remaining in business were looking at cheaper substitutes for the traditional accountant
  • Businesses were carrying out many of the accounting functions in-house, such as payroll services, vat returns and bookkeeping which were traditionally core revenue streams for the business
  • Demand was increasing in insolvency but the firm did not have the personnel to cater for this demand.

Skilled labour

  • Although there were areas in the sector that were growing, such as insolvency, Paul was simply unable to recruit an insolvency practitioner due to the limited number in the market and that they were in high demand.
  • The salary costs of many of the experienced accountants made redundant made them an unrealistic option and many of them would have been unlikely to want to carry out the tasks of a trainee.
  • Trainee accountants emigrating abroad left a pool of talent that consisted mainly of experienced accountants who for the time being at least are unwilling to work for a lower salary