Increasing ATO debt will mean increased risks for boutique and SME firms; and these two firm leaders weighed in on how firms can combat these latest challenges.
In June this year, the Reserve Bank hiked up the official interest rate to 0.85 per cent – the biggest single rise in the cash rate in over two decades. This means that SME businesses with large debts with the Australian Taxation Office will be most at risk.
Balance Family Law principal and co-founder Perpetua Kish said that in addition to the rate rises impacting costs “on all fronts” for smaller firms, boutiques applying for loans may also face tighter lending standards.
“It can be challenging for smaller firms to attract and retain staff, and there will be added pressure to provide competitive remuneration packages to match what workers may be paid in larger organisations or the government. Boutique and SMEs have frequently beckoned prospective employees by offering appealing conditions such as flexible work arrangements, when they may be unable to match the remuneration offered in larger organisations,” she explained.
“The rate hikes in combination with the post pandemic ‘new normal’ may see boutiques lose this edge when employees, feeling the impact of the higher costs of living, may seek an increase in pay over more flexible working conditions. This is particularly evident, as remote or hybrid work arrangements are no longer the exception, but the rule in post-COVID 2022.”
These risks are essentially a double negative for smaller businesses compared to large firms with more money behind them, explained Travis Schultz & Partners managing partner Travis Schultz.
“Smaller firms typically have a client base that is more susceptible to cost of living pressures, meaning lower demand for services and a decreased ability of the clients to pay. Couple that with a higher cost of funds and it’s a double whammy for the operators of ‘small-law’,” he said.
“[To combat this], I’d argue that the smaller players in the legal sector need to resist the temptation to cut costs. We need to look for opportunities to increase the revenue base rather than reducing overheads as that can have an impact on productivity well beyond the value of any cost savings.”
Similarly, Ms Kish said smaller firms need to focus on finding “win-win” options, both for their staff and clients alike.
“Small firms must consider the big picture, and in a changing economy, have systems in place that act as a buffer. This could be as simple as making sure that during payroll, monies are automatically set aside for tax and superannuation payments, and those inevitable rainy days. Or prioritising regular tax planning strategies with their accountants,” she added.
“Resilient boutique owners think creatively, intuitively and are always responsive. They are curious and good listeners. They seek to understand their employees’ concerns and challenges, and work with them to devise win-win outcomes. They also understand their clients, adapting their services accordingly, and perhaps most importantly, they truly understand their business, their purpose, and their bottom line.”
Whilst boutiques and SME firms have a “greater capacity to adapt to and leverage positive changes”, they will also be the first to experience any negative effects of rate hikes and a slowing economy.
“Outgoings are generally lower so boutiques may not see the need to set aside funds for tax, super and other expenses. Some even living week-by-week for cash flow,” Ms Kish added.
“The client base is also vastly different. A large and varied client base makes it less likely that a firm will encounter financial difficulty. BigLaw clients aren’t going to suddenly cut legals from their budgets when finances are tighter, but the boutique law client may do just that, particularly where increasing living costs see legal assistance moving down the list of their priorities, relegated as a ‘non-essential’.”
But whilst the additional risks associated with ATO debt and rate rises should act as an opportunity for growth, according to Mr Schultz.
“BigLaw have access to resources, consultants and financial expertise which is sometimes priced beyond the reach of the smaller players – and without the rigour of the financial scaffolding around us, SMEs can yield to the temptation to buy into the negativity surrounding well publicised headwinds,” he said.
“Rising interest rates might tempt us to retract into our proverbial shells, when what we should really be doing, is setting our risk appetite, recalibrating expectations and looking for the opportunities to grow revenue beyond the increases in the cost of doing business.”