By Alex Vuchnich, CPA, CFE - When working with CPA and accounting firms, one of the frequent questions I encounter is how to take what starts as a financial analysis and leverage that into an advisory service. As financial professionals we are well versed in interpreting financial statements and analyzing the results of a client's financial performance. We use tools like ratio analysis and trending to draw conclusions about how an entity performed in the most recent period in various key areas, such as liquidity, profitability and sales growth. After drawing these conclusions and communicating them to our clients, many times the natural follow up from the client will be, how does this relate to my business operations and what can I do about it. This is where we have the opportunity to convert what started as a simple financial analysis into an advisory service.
In establishing this type of engagement the first step is to simply present the results of the clients financial performance based on your analysis. Generally it is best to highlight just a few items from each point of your analysis so that the client does not get overwhelmed by the sheer magnitude of metrics. I would consider selecting maybe one or two large variances (positive or negative) in each performance area to discuss and focus on. For instance if liquidity were declining I might highlight days' sales in receivables or if margins were declining I might focus on a specific expense account where an increasing trend was noted.
The next step is to obtain an understanding of the operational activities that are driving the financial metric that has been highlighted. For many advisors, this is where fear or uncertainty will prevent further action. Many times we are not entirely certain what particular aspect of our clients operations is the driver for performance. As a result we don't ask in fear that our expertise or knowledge of the client might be called into question. Of course, this is not the case. The next step is engage the client in a discussion by asking them to explain why we are seeing a particular variance and in doing so obtain the understanding we seek. This opens up two way communication with the client, positioning yourself as their advisor and they will most certainly be grateful for your interest in these details about their business operations.
Once the performance metrics have been highlighted and the underlying drivers identified, now is the time for the advisor to add value by developing and assisting in implementing a solution for the client. We can draw from our vast experience with our client base to come up with good recommendations for operational improvements. One good exercise to consider is holding a brainstorming session with your fellow staff members and employees and identify some of the most common problems and solutions small businesses face and then create an Excel database that can be easily referenced and shared throughout the firm. Also, do not feel that you must provide an answer on the spot for a potential solution to a client's problems. There is nothing wrong with explaining that you might want to take some time to consider several alternative solutions and evaluate which is best for the client. This can be a great segue way into engaging a client to compile a projection or forecast.
To tie this all together, let me end with an example case that incorporates the methodology above. At the completion of a financial statement audit for a manufacturing company, a brief exit conference is set up to go over the results of the audit with the client's management. Prior to the meeting the audit firm prepares a financial analysis and highlights a couple of key areas. These key areas are selected to correspond with some of the management letter comments that the audit firm prepared so as to reinforce those points. During the meeting the audit firm presents the results of the audit, the management letter comments and then takes a few minutes to go over the results of the financial performance analysis. One item noted is that net income margin is on the decline and there were several expense accounts that have shown an increasing trend over the past several years. The audit firm inquires about what is driving these variances and the client's management is not entirely sure but admits that their budget process is not as effective as they desire (for many SMBs it may be nonexistent). The audit firm then proposes that they enter into an engagement to assist the client in improving its budget process by compiling a new budget forecast and providing recommendations for management to consider implementing over spending controls and budget monitoring.
The possibilities for these types of advisory services are nearly endless and will help to ensure that our clients weather through the adversity in the current economic downturn.