Why your existing accountant might unwittingly put you out of business

Your accountant is hard-working and you appreciate the work they do for you.  You like them and don’t want to let them down.  However accountants who are not specialists in the training sector can unwittingly put their clients very business at risk if they’re focused on the wrong things.

Training companies on RoATP or RoTO, are required to pass the ESFA’s Financial Health Assessment each year.  Failure to do so and they risk having their contracts withdrawn.   Accountants who don’t understand the FHA (or who aren’t even aware of it), often fail to advise their clients to be mindful of the following:

1. Dividend payments:

Dividend payments will reduce the company’s profitability for the purpose of the FHA.   Accountants often make dividend advice taking into account only tax efficiency.  Whilst this is important, it’s a secondary matter to staying on RoATP or RoTO if that dividend payment could put your company out of business.

  • Simply changing the timing of dividends can achieve the same level of reward to shareholders, whilst protecting the company.
  • The FHA score can be moderated by the ESFA if the directors request it.  As a dividend can often reflect many years work, not just the last financial year, this is strong grounds to have the FHA score mitigated.

2. Taking on debt.

Taking on debt, even if it’s an injection of funds from a director, could actually kill the business.   Increased debt reduces the company’s FHA score as it increases gearing.  The solution:

  • Only take debt to the extent that the FHA score is not a fail.  This requires timely and accurate management reports to ensure the directors can make a decision with the facts to hand.
  • Convert directors loans to equity.  i.e. the money is no longer repayable to the director.  A difficult pill to swallow perhaps, but potentially not all the debt needs to be converted, and if the prize is to continue trading, then it’s well worth it.

3. Managing poor performance.

A short period of poor P&L performance can kill a company’s FHA score.  Failure to appreciate this leaves some accountants to fail to see the bigger picture, but there are fixes to consider:  

  • The company should be advised to review its income recognition practices to see if it is leaving income out of the P&L which would be better reflected in the year’s performance.  E.g, accrued completion income.  This is income that the business has earned, but not yet billed for.
  • The company could change it’s period end, extending or shortening it.  A different accounting period could give a very different FHA result.  Some caution is required here as there are restrictions around changing the period end date, and it shouldn’t be done with out taking advice.
  • Most importantly, poor P&L performance should not be a matter to be reviewed at the year end accounts.  It should be dealt with as it arises – with management reports explained to the directors by appropriately skilled personnel, either within the company, or bringing in services such as those offered by us.   Changes can then be made which avoid a lengthy period of poor performance, and the hard graft of reversing months of substandard performance.

We understand that changing accountants is a big change, and not an easy one.  Change is harder when there’s loyalty with your accountant and perhaps they’ve done an decent job.  But what if they’re holding you back from your potential.   As you’re reading this, it’s a reasonable assumption that you may be suspect the same thing.  We’d like to explore that with you.

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