I liked this article so much that I asked the author to share it with me for the newsletter. It is written for accountants, but it should give all of us a sense of what we should be expecting from the folks that help us with our finances.

—Leita Hart-Fanta

------------------------------------------------------------

How to Use Written Financial Analysis
to Serve Your Clients Better

January 2007

By Brian Hamilton, CEO, ProfitCents

When you go out to dinner, you are usually hungry. When you buy water, you are thirsty. When you buy a winter jacket, you want to stay warm. In these individual cases, the value exchange between buyer and seller is clear and there is a definite need and solution set.

In accounting, less certain is that we are giving clients what they need. Sometimes, we don’t know what they need, which is born of the fact that we either don’t ask them or they don’t tell us. Clients are sometimes intimidated by their accountants or by accounting and sometimes clients don’t quite know where their pain points are, at least with respect to accounting and finance. By the time the pain points become obvious (i.e. a client runs out of cash), it is too late.

Often, clients don’t know enough about our knowledge pool to tap into what we might provide and what they need. Let’s examine two broad challenges that people face each day in running a business:

1. They typically have at least some sense of isolation or separateness that comes from being on their own. It is lonely running a business for many reasons that reach beyond the scope of this article. For most of our lives starting from grade school, we are conditioned to be part of a structure or a group. I believe that the largest determent to starting business is the sense of fright that comes from the realization of staring at detachment.
2. They need good advice and information to help them run their businesses. Many businesses suffer from a lack of adequate information and advice. The reason that businesspeople need advice is that they are not competent in all the operating areas of a business.

As accounting professionals, wouldn’t it be nice to intersect the things that we are very good at with the highest and most acute needs of the client? The best professionals can combine “1” and “2” above by reaching out to clients and helping them by giving them appropriate advice and information. So, how can we intersect what we know with the needs that clients have? The accountant needs to hold a line between trying to help out without moving too far into areas at which they are uncomfortable.

People who run businesses are typically very good at either selling or getting products and services delivered well. In the food chain of needs, selling products is probably the highest need. Entrepreneurs are not very good at making financial decisions. In fact, they are usually terrible at finance and have no interest in it. What does this mean? It means that they typically ignore finance and accounting.

As a result, what happens in companies where the people running them have little financial knowledge? (Please note that we are ignoring “sick” companies, those that have products or services that don’t meet market needs, where the companies are doomed to fail sooner or later):

1. Founders or principals are such good salespeople that they can make up with great sales volume what they miss in financial inefficiency. In general, this scenario is not such a bad outcome. If clients can generate super sales volume where marginal revenue exceeds marginal costs, then good things happen. Did you ever have a client that infuriated you at some inner level because, despite their obvious indifference to finance and accounting, they still do well? In these very rare cases, this dynamic can make you feel unnecessary.
2. Founders or principals are really super operational people and fairly good salespeople. They can sell pretty well because they know the product really well and because they flat out know how to make things happen and get out great products and services. The need for reasonable financial skills in these cases is lower as well. These companies can do fine even though they may not have great accounting and financial skills. These cases, too, are less than common.
3. Founders or principals are pretty good salespeople and are pretty good at pushing out good products and services. Yet, these above average skills cannot overcome both the inclination for poor financial management and the lack of interest in it. This is where many businesspeople fail, since most of us are good at some things but not super performers in anything. These types of businesses and people can and do struggle. The people running these businesses need your help.

Most business people can benefit from understanding their financial condition and making better decisions. Why? Because financial numbers tell a story about almost all areas of a business. Your job is to tell the story of a business by helping your customers understand the financial picture of the business. Take a simple case. Suppose a business has a low gross margin that is slipping over time. (Sales less cost of sales/sales)? What are the ONLY possibilities here relevant to the business?:

1. The company is not controlling inventory or direct costs. Managers need to get unit costs under control. Perhaps direct labor is out-of-line. Perhaps people are not being managed efficiently. Maybe new suppliers are needed.
2. Prices need to be boosted. If prices cannot be boosted, then managers need to assess why. Maybe it is the market. More often, the company is not meeting the needs of clients and the marketplace.

The idea is simple—help your clients look at financial statements, understand what is going on, and make a plan to get better results. Here are some guidelines:

1. Sit down with clients once per quarter and go over their financial condition with them. Bring the financial statements of the client and bring some written analysis to help them understand their statements in plain language (Don’t throw a bunch of financial numbers at them that they will never understand). There are excellent technologies available that take hard-to-understand numbers and convert them into easy-to-understand plain language.
2. Be sure to set the right tone in these meetings. Don’t talk down to clients. Ask questions. Listen carefully. Go over the numbers carefully. Try to look at the important numbers—the key performance indicators.
3. Put all the numbers into practice and action. Make a plan. Financial numbers come alive when they are understood and acted upon. Give the owner some simple things that he/she can do to improve performance.

By providing useful analysis, an accounting professional can become a confidant to the business owner and can help the business owner with tangible things to become successful. Accountants are more than compliance professionals; they are in a unique position to build a great relationship with people who need friends and who need great information.

About the Author

Brian Hamilton is the chief executive officer and leader of the management team for Sageworks, Inc., which develops ProfitCents (www.profitcents.com), an application that aids accountants in communicating with clients. Brian can be reached at brian.hamilton@sageworksinc.com or 919.851.7474 (x501).