Covid-19: Stress testing revenues of SMPs in East Africa

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Written by CPA Dr Albert Richards Otete  

Small and Medium Practices (SMPs) had faced challenges in deciding on the most optimal human capital strategies partly because there was limited or no empirical research to link human capital to the competitiveness of accounting firms, more so in the East African region. The author embarked on a journey to bridge the gap in the literature and commenced the research in 2016 and was fully supported by the Institute of Certified Public Accountants of Kenya (ICPAK), the Institute of Certified Public Accountants of Uganda (ICPAU) and the National Board of Accountants and Auditors of Tanzania (NBAAT). A random sample of 520 SMPs (out of 1,130 by then) in Kenya, Uganda and Tanzania were contacted to participate voluntarily and 409 eventually responded.

In November 2019, the models from the data were presented at the ICPAU Practitioner’s Forum so that they could be used for budgeting, planning and forecasting. However, by March 2020, the Covid-19 crisis had escalated into a worldwide pandemic which forced many countries to implement lockdown measures which culminated in border and airport closures, banning of private and public passenger transport, social distancing, closure of schools and many other organizations. These paralyzed many businesses, including the SMPs.

The revenues of the SMPs will be impacted negatively in 2020. However, given the unique nature of SMPs, it was important to leverage on the earlier research data to perform stress testing and forecast of the human capital and revenues for 2020. The assumption is that the SMPs will try to maintain the same number of partners, supervisors and assistants they had pre-Covid-19. On average, the SMPs have 2 partners, 4 staff at Supervisor-level and 10 at Assistant-level. Whereas the SMP professionals (partners and staff) could theoretically work-from-home, most of the auditing/assurance and consulting work requires physical visits to clients’ (most of them being SMEs) premises. These visits are not possible due to lockdown which began in March 2020.

The lockdown measures have paralyzed the deployment of partners and the professional staff of SMPs to undertake assignments at client premises. Prior to the Covid-19 pandemic, the deployment rate was about 58% (which approximated to 150 working days out of 260 working days in a year). As shown in the following graph, by May 2020, that number had fallen from 150 to 117 working days. The reduction is due to the lockdown. If the lockdown continues into June 2020, the deployment will equally continue dropping. By December 2020, that number would have plummeted to just 33 working days, a very paltry figure indeed.

The International Federation of Accountants (IFAC) recommends an efficiency level of 50-70% for Partners and between 70-80% for the other professional staff. The figure of 33 working days would be a dismal 13% efficiency level. The graph below illustrates the pre-COVID-19 deployment of partners/staff.

One of the models that emerged from the research enabled SMPs to forecast and plan for revenue.  In terms of total annual revenue (in USD), the model was Z = 9,581.03A + 36.38E + 0.226F – 101,000 (constant), where:

Z = Total annual revenue (in USD), A = Total number of professionals (partners/staff), E = Annual development spend (in USD) and F = Annual human capital cost (in USD).

The annual human capital cost is a function of the number of chargeable days in the year, the number of partners/staff and the daily charge-out rates. The assumption has been that most SMPs have maintained their staff complement and their charge-out rates for now. The problem has been the reduced deployment of staff. Prior to Covid-19, the average revenue for SMPs was USD 1200 per month per professional staff. The Covid-19 lockdown has started to slowly whittle down that figure to USD 1018 per month per professional staff as of May 2020. In the worst-case scenario where lockdown continues till December 2020, that figure will have fallen to USD 482 per month per professional staff for the year 2020.

If staff have not been furloughed or laid-off, staff salaries are part of the fixed costs the SMPs will incur on a monthly basis during the lockdown. One other critical fixed cost is office rent despite the fact that staff are locked down and not even using the offices. Should the revenue drop below a tolerable level and liquidity dissipates due to after-effects of Covid-19 lockdown, SMPs will not be able to pay staff salaries and rent. This weak financial health may have a multiplier effect on the SMPs and affect their ability to operate optimally in the foreseeable future, including completing existing assignments, bidding for new jobs and attracting/retaining professional staff.

Recommendations for SMPs

Using their own specific data for a number of clients, a number of partners/staff, actual revenue for the four months from January 2020 – April 2020, the pipeline of outstanding jobs and invoices, a forecast of likely revenue for the year 2020 can be developed using optimistic, (most likely) and pessimistic, (less likely) scenarios. Optimistic is lockdown lift in June 2020 while pessimistic is lockdown extension till December 2020. Stress testing of the SMP business resilience should also take into account the level of cash in the bank and the rate at which debtors will pay and the extent to which creditors can be patient with the firm regarding obligations. If stress testing reveals an impending liquidity crisis, the SMP needs to take immediate corrective action to stop any further ailment. In the meantime, partners/staff can use the low season to attend webinars and continue acquisition of skills. The staff who are pursuing a professional qualification like CPA (U) can continue reading for August or December 2020 exams.


CPA Dr. Albert Richards Otete has been a Certified Public Accountant (CPA) for over two and half decades and is a member of the Professional Accountancy Organizations in Uganda, Kenya, Tanzania and Rwanda. CPA Dr. Otete holds a Doctorate in Business Administration, a Masters of Business Administration and a Bachelor of Commerce (First Class) degree. CPA Dr. Otete is a member of ISACA International and is a Certified Information Systems Auditor (CISA®), Certified Information Security Manager (CISM®) and is Certified in the Governance of Enterprise Information Technology (CGEIT®). CPA Dr. Otete is an Insolvency Practitioner and has diversified into the realm of regulated fund management, investment advisory and private equity. CPA Dr Otete has published a number of articles in peer-reviewed international journals and will continue to research on various topics. CPA Dr Otete has written in accountancy journals/magazines for ICPAK, ICPAU and iCPAR as well as educative articles for newspapers in Uganda.

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