Preparing Future-Ready Professionals
Challenges & Opportunities for Sole Practitioners—and How PAOs Can Help
George Willie, Johnny Yong | January 11, 2021
Sole practitioners are a mainstay of the profession globally. About 30% of over 6,000 respondents to the IFAC 2018 Global SMP Survey were sole practitioners. Based on a recent informal survey of the members of the IFAC Small- and Medium-Sized Practices Advisory Group (SMPAG), sole practitioners make up 50% to 75% of the practices in almost half of the jurisdictions being polled.
During a recent SMPAG meeting, members noted that there is no single definition of a sole practitioner globally. The IFAC Global SMP Survey used the definition of sole practitioner as one without any other partners or staff. However, there are jurisdictions which include proprietors with staff in their definition. From the SMPAG poll, among jurisdictions where sole practitioners with staff are included in the definition, more than half have 2 to 5 staff either on their payroll or employed as subcontractors. Some Professional Accountancy Organizations (PAOs), such as those in Hong Kong and Malaysia, have records of sole practitioners that employ up to 30 staff at any given time.
The Challenges and Benefits of a Sole Practitioner Model
Recently, there has been anecdotal evidence that sole practitioners have been particularly impacted by Covid-19 because of the level of support required by their clients, the costs of being in practice (made worse by non-payment from some existing clients), and because many small businesses have been forced to close due to the pandemic. In a recent OECD report, small-and medium-sized enterprise (SME) surveys identified the impact with more than half of SMEs facing severe losses in revenues, one third fear being out of business without further support within 1 month and up to 50% within three months.
As small businesses themselves, sole practitioners are also facing many challenges. Based on IFAC’s 2018 Global SMP Survey—the latest available data—the following are the most prominent challenges sole practitioners have reported:
- Keeping up with changes in regulations and standards (59% of sole practitioners, compared to an average of 45% across all other practice segments);
- Attracting new clients and retaining existing clients (50%, compared to 46%);
- Pressure to lower fees (45%, compared to 48%);
- Competition (44%, compared to 46%); and
- Rising costs and managing cashflows (42%, compared to 39%).
While pressure to lower fees and competition are slightly lower for sole practitioners, the other three challenges are elevated. There is no reason to suspect that these challenges have since been ameliorated in the current pandemic situation.
The challenges for the sole practitioners are usually more significant compared to those of a partnership and other business models because:
- Sole practitioners cannot easily share ideas among peers. In a typical sole practitioner’s set-up, there is no peer at the top of the organization.
- Operations are limited by a relative lack of assets, low savings for investment in the practice, and limited access to funding.
- Keeping up with the rapid changes in technology, rules, and regulations can be especially overwhelming to a sole practitioner because of the feeling of personal isolation; and
- A lack of time. As operating environments become more complex, this time disadvantage may limit sole practitioners’ ability to learn or re-learn skills to deal with such upheaval.
Module 2 of the Guide to Practice Management for Small- and Medium-Sized Practices (PM Guide) lists some of the benefits for a sole practitioner’s business model compared to a conventional partnership. These includes single point of final decision making (the process can be fast), no need for profit sharing, flexibility to change the internal rules quickly and adapt to market demands and, for some people, the sense of direct involvement and control can be appealing.
How Can Professional Accountancy Organizations Help?
During the recent SMPAG meeting, the advisory group was asked about the type of support that PAOs should consider offering to this significant segment of the profession. The responses yielded many insights. These include:
- Share information on technology tools and resources that sole practitioners can leverage. For example, SAICA has published a comprehensive manual on the types of software available in the South African marketplace.
- Consider negotiating financing packages for sole practitioners to make technology investments. The Malta Institute of Accountants (MIA), for example, worked with information technology suppliers to offer software packages to its practitioners in the area of due diligence. The Malaysian Institute of Accountants (also MIA) collaborated with debt factoring companies to offer invoice factoring services to audit firms.
- Consider a range of mechanisms, activities and events to ensure sole practitioners are regularly engaged so that they are able to draw the support and access the information they critically need.
- Encourage sole practitioners to learn about social media and to leverage these platforms – especially in attracting and retaining staff.
- Facilitate informal networking meetings. In Germany, for example, IDW is encouraging their sole practitioners to build up their business referral networks with lawyers because of the synergy of these two professions.
Future Opportunities for Sole Practitioners
Research findings continue to show that, irrespective of jurisdiction, accountants continue to be the preferred advisors to SMEs. Professional business advice provided to SMEs is associated with better performance as measured by improved rates of survival, growth, improved decision-making and superior financial performance.
The SMPAG provided tips and advice for sole practitioners to embrace the future, which included:
- Don’t become too resistant to change. Seize the opportunity when it arises. IFAC recently launched a Practice Transformation Action Plan - A Roadmap to the Future that outlines the importance of embracing change, leveraging technology, talent management and building advisory services.
- Most sole practitioners have a “traditional” business model. They should consider moving out of their comfort zone. Specialization is a way for the practice to remain relevant in the marketplace. For example, a focus on a specific area such as a family office, charities etc. Advisory services are also a growth area for accounting practices. Gateway articles such as “Firms of the Future – Building Advisory Services” and “Transition into Advisory Services – Leveraging Partnerships & Networks” are a good read for firms with such aspiration.
- Networking and regular communication with other practitioners can be a useful mechanism of informal support. Being proactive in developing networks and alliances can help enable a firm to be future-ready. Through these networks, sole practitioners can learn from their peers, refer their clients to other specialists for services that they themselves don’t provide—and receive referrals in turn.
- Be aware of the value of branding. To continue to have staying power, it is important for the firm to build up its unique selling proposition.
- Having a clear strategy (be it revenue or growth) can be a matter of success or failure. Sole practitioners must be able to answer an all-important question: “What do you want to be?” Being everything to everyone may not be workable over time.
- Understanding work-life balance is critical since the one and only driving force of the practice is the proprietor. Even for those sole practitioners with staff, setting the right tone at the top will help ensure the firms staff will not experience any long-term burn-out.
- Being involved in joint audit can be a useful step to build the capacity of the firm – if audit is the firm’s mainstay.
IFAC has produced a suite of materials that cover sole practitioners. Modules 7 and 8 of the (PM Guide) include risk management and exit considerations in relation to sole practitioners. The IFAC Guide to Quality Control Manual (3rd Edition) has a sample quality control manual for a sole practitioner with non-professional staff.
While a number of IFAC’s Knowledge Gateway articles, such as “Encouraging Successful Exit Strategies – Passing the Baton” or “ How to Support the SMPs of the Future” were written with SME and SMP audiences in mind, many of the suggestions and initiatives will be equally practicable for sole practitioners.
The sole practitioner business model will continue to be viable and rewarding into the future. With support and guidance from PAOs and others (such as peers and networks), sole practitioners can and will be in a better position to continue playing a significant role in supporting small businesses to effectively navigate these uncertain times.
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