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, it’s less certain 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 (e.g. 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:
- They typically have at least some sense of isolation or separateness that comes from being on their own. There is little or not enough written on this subject because it is quite difficult to describe. Yet, a person’s sense of isolation in running a business is a real and important matter. 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. We are members of a team, we are members of a class, we are members of a neighborhood, a scout troop, a university, a family. I believe that the largest deterrent to starting a business is the sense of fright that comes from the realization of staring at detachment. Not having a group to be attached to is scary before you start a business and lonely after you start the business. I am also not sure that this can be explained very well by anyone (least of all by me), in the same way that it might be difficult for a war veteran to explain to a civilian what it is like to be in war.
- They need good advice and information to help them run their businesses. There is much excellent information available on the information needs of small businesses. However, sometimes we mistake a need for good information with the symptom created when good information is not available. For example, while it is true that businesses need capital and resources, it is the lack of good information that often eventually drives the lack of resources and capital. If you run out of cash, you usually do a bunch of things wrong to cause this. So, in this way, it is tempting to mistake a symptom for a cause. 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. Think of it. If you run a business, you need to at least have a modicum level of competence in hiring people, training them, leading them, marketing products and services, selling products and services, doing compliance things, operating a business, and doing finance and accounting. There may be some people who are competent in all the areas of running a business but I don’t know any of them. Most people have an area of excellence in something when they start a business. Many people are also competent or average performers in other areas of running a business. People usually also have at least several areas they are not competent in. For example, most people who run businesses are distinctly incompetent or disinterested in the whole area of financial management and accounting, which can cause massive problems.
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 in 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. Developing great products is also a high need. Entrepreneurs are effective at selling products and getting out good products and services. They are not very good at making financial decisions; however. In fact, they are often 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):
- Founders or principals are such good salespeople that they can make up with great sales volume what they miss in financial efficiency. 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.
- 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.
- 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) divided by sales)? What are the ONLY possibilities here relevant to the business?:
- 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.
- 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:
- 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.
- 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.
- 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 confidante 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 developer of ProfitCents. Based in Research Triangle Park, North Carolina, ProfitCents produces narrative text about what financial statement numbers and metrics mean in plain language. Hamilton can be reached at [email protected]