Five Reasons Why Apprenticeship Providers Go Out Of Business

When we start out in business, we all dream about changing the world, using our skills to enhance people’s lives and build a sustainable business capable of supporting our financial dreams. No doubt that was your aim when becoming an apprenticeship provider and it still is. However, it’s not easy. The hours of hard work and persistence you put into your business doesn’t always reap the results they deserve, often putting your company’s long-term viability at risk. It’s a tough balancing act and it’s critical to know how to avoid the obstacles that can hinder profitability – and the future of your business. Our experts at Cloud have explained five reasons why apprenticeship providers go out of business (and how to avoid it!).

The Reality

apprentice business profit

The reality is that a large amount of independent training providers aren’t making the level of profit they should be. You don’t need to be told twice that this puts pressure on making payroll at the end of each month and a strain on the finances of the owners who need the company to succeed. As an owner, it can easily lead to insufficient and unpredictable earnings – sometimes even less than their own staff! Simply put, this isn’t viable long-term.

It also impacts your management team’s ability to invest in critical areas of the business; this can often affect company performance for any apprenticeship provider. Whether learner documents haven’t been processed properly or corporate governance is suffering, the spectre of an ESFA or Ofsted audit poses a very real risk to the company’s ongoing viability. Finally, this could easily transfer into personal finance problems for the Directors themselves. When your earnings are inconsistent, it can feel like feast or famine, which can quickly put stress on family life. It can turn into a vicious cycle that affects motivation and morale within the business, impacting company culture and performance. It isn’t easy.

So what are the key reasons your apprenticeship and training company isn’t making sufficient profit each month? How can you remedy this? Here’s five reasons why apprenticeship providers go out of business.

1. Not having a financial plan

It seems unthinkable but it’s a lot more common than you think. Most training providers simply hope to beat the last financial year, but don’t put anything in place to ensure they do. They simply ignore the necessary work required to make sure they deliver the right result for the owners. In some cases, they can get to year-end with their head in the sand and discover financial performance has been so poor that the company will fail the ESFA Financial Health Assessment (FHA). This is a heart attack for most companies who are then out of business within months.

How to avoid this

By simply timing dividends differently – or breaking them up into tranches – you can get around this issue.

You should also have your company’s annual budget broken down into months and assess the actual performance against expectation. Each actual month should overwrite the numbers of the Profit & Loss (P&L) and balance sheet budget to give revised year-end figures. Those year-end figures should then be scored according to the FHA criteria to give the company an expectation for the year-end score. This way, any risk of failing the FHA is flagged during the year, providing ample opportunity for remedial action to be taken. Bear in mind, you can be quite creative if necessary, by moving year-end, shifting dividends or turning debt into equity. That said, we’d highly recommend only doing this after taking advice from experts.

financial planning

2. Making dividend payments

Every company exists to make profits for the owners, right? Of course, but consider the fact that dividends are taken off profits for the purpose of the Financial Health Assessment, so caution is needed here. Our experts have come across many training companies where their previous accountant has advised a dividend level based purely on minimising personal tax. As a result, they have put the company’s entry on the Register of Apprenticeship Training Providers completely at risk.

3. Not accounting for VAT correctly

When your company is delivering a number of different training programmes, then the requirements around VAT can quickly get complicated. For example, say you deliver Learner Loans (standard rate for VAT purposes) and Apprenticeships (exempt from VAT), then the company is considered partially exempt for VAT purposes. What does this mean? Basically, not all the VAT on costs can be recovered. As a consequence, many training providers often under pay VAT as a result, running the risk of repaying the VAT – plus interest and financial penalties – at a later date.

The consequences can be severe. Penalties are upto 100% of the VAT underpaid and can in effect cause a severe cash flow crisis. These problems are often revealed at the point companies are sold, dashing the owner’s dreams as company value is subsequently reduced. Any retirement plans are also swiftly put on-hold while a lengthy VAT investigation is carried out. Whereas some compliance investigations can be completed within a matter of months, it has been known to take 2-3 years for larger organisations.

It is advisable to deal with VAT correctly from the very beginning, avoiding any subsequent headaches later down the line. If issues do arise, keep HMRC informed and unwind the problem in a controlled manner. It’ll help reduce any penalties.

4. Taking on debt

Taking on debt can appear attractive, particularly in view of major government support initiatives such as the Coronavirus Business Interruption Scheme (CBILS) and Bounce Back Loans. However, take into consideration that these loans will affect the company’s Financial Health Assessment score and could potentially put your listing on the Register of Apprenticeship Training Providers at risk.

How to avoid this

The key here is to model the effect of the loan on the Financial Health Assessment score prior to taking it out. Doing your due diligence in this area is critically important. Another way would be to time the loans to be just after year-end, maximising the amount of time the company has to generate positive results and to keep your FHA score on the right side of a pass.

performance issues

5. Not addressing performance issues

Building on from the previous point, taking on debt could also be an indicator of an underlying performance issue. If your training and apprenticeship company has insufficient cash caused by a lack of profitability, taking on debt isn’t going to solve it. All it does is simply delay the day of reckoning. It doesn’t help anyone.

How to avoid this

Set very clear Key Performance Indicators (KPI’s) such as caseload per assessor, out of funding learner rates and completion rates. Determine a clear plan on how to improve these and stick to it.

A detailed financial model which demonstrates how – over time – these metrics lead to improved profitability and a healthier cash balance is worth its weight in gold. It will also ensure any loan funds are deployed to maximum effect.

Why it’s critical to have an accountancy partner experienced in this field

You didn’t set out as an apprenticeship provider to delve through endless spreadsheets, management reports and HMRC correspondence. So you’ve either hired someone internally or outsourced this work to an accountant. That’s fine, but are you really getting a clear picture of how your business is performing? Did you beat last month’s expectations? How is the next month likely to look? Where will the business be by year-end? If you can’t answer these questions, a change needs to be made.

The fact of the matter is that most accountants aren’t specialists in the training industry. Of course, they’ll provide some great generalist expertise and advice, but that’s not helpful when building a business in an industry as niche as training. It was one of the key reasons we set up Cloud – to help training companies achieve their potential. It’s what we do.

How our experts can take your training company’s finances to the next level

There’s no doubt that a qualified accountant knowledgeable of the challenges inherent in your market is invaluable; they can provide a critical foundation for growth and informed decision-making. We’re able to provide our customers with the right advice and expertise to steer them in the right direction. Simply having the right technology in place is a good place to start. All of our customers use Xero and Receipt Bank as a starter-package. However, like any technology platform, they’re only as good as the data going in and the processes underpinning how complete and accurate it is. We’ll advise on how to improve this.

cloud accountant experts

So how can our experts at Cloud help your training company deliver optimal financial performance?

  1. Our qualified accountants have a wealth of experience supporting training and apprenticeships providers across the United Kingdom. We know what works, what doesn’t and how the industry operates.
  2. You’ll receive regular reports and an in-depth company presentation, shining a light on your business performance.
  3. We’ll provide full visibility on the likely year-end performance of the company, what this means for it’s long-term future and how it affects the owner’s financial plans
  4. When the going gets tough, the tough get going. We’ll be with you in the trenches, overcoming any challenges and ultimately building a profitable, scalable and successful business.

How do we do this? Primarily via regular communication, the sharing of ideas and providing the magic touch when human analysis meets technology. Let us take away the headache of financial management, giving you more time to focus on the added-value activity that only you can provide – whether that’s new contracts, recruits, system implementation or culture development.

Ultimately, by working with the team at Cloud, your business will have a bespoke, well-run finance system that provides full visibility of bills, ensuring they are paid on-time and that cash is carefully managed to ensure the business can run effectively. It can also ensure all taxes are paid and that profits are distributed by way of dividend as a reward for successful performance. As a result, company finance problems, performance issues and personal finance troubles for the owners can all be avoided – or made a thing of the past!

Check out our dedicated page on how Cloud provides specialist support for training companies and the value we can provide your organisation. If you’d like to discuss how you can work with our experts and reap the financial benefits for your company, contact us today on 0113 323 1960 or for a confidential discussion!