27th November 2014
Accounting firms in the US are keeping cash in the business rather than compensating partners as they look to invest in the future.
Following the ‘Great Recession’, the economic downturn in the late 2000s, firms continue to recover and now look to store up reserves of equity and cash in order to keep liquidity high in preparation for a number of upcoming financial hurdles.
While the 2014 MAP survey looks at firms in the US, many of the findings are applicable on a global scale.
One of the key findings points at a trend-switch in 2014 where firm owners prefer to keep cash in-house instead of compensating partners.
A potential reason for this switch is the approaching date of the baby boomer generation’s retirement. Retiring partners will need to be bought-out and many firms lack the cash flow and liquidity to do this.
Buyouts of retiring partners would leave internal succession open, which would help solve the problem of finding replacements at the senior partner level.
But many firms will find that internal succession, while an appealing solution, is not an option due to a lack of young talent or absence of funds, which leads us back to firms looking for an exit via merger or acquisition.
This led to the past three years’ dominant trend of mergers and acquisitions as a means of financing retirees.
A year-old report from the Journal of Accountancy points out this trend produced a market of buyers, depressing firms’ valuations, making it less appealing as a strategy.
Therefore, to make a real return on their time and money investment, leaders must make a real plan for the future.
To ensure the long-term stability of their business, a number of organisations are taking “conservative steps”, said Mark Koziel, the AICPA’s vice president of firm services and global alliances.
“They’re plowing money back into the firm or reserving it for future use rather than doling out every penny in profit to owners and partners. Succession planning, budgeting for new hires, merger strategy, and hedging against uncertainty all play a factor in this kind of decision-making”, he added.