The best business people I know are always ahead of the financial data they possess; that is, the shrewdest people running businesses have an inherent understanding that good management decisions are based on what is going to happen rather than on what has happened. I have worked with hundreds of people who run businesses and the approach often makes no sense to the rest of us. Yet, there is clearly some reasoning that they use to gather information and break down complex decisions. This is an alien approach to those of us working with financial data because our job is to report on results.
The answer is not to discard financial statement. Rather, accountants need to connect what has happened to what business people want to happen. This is very difficult to explain, much less to understand. This is where many business people, even good ones, fall off. They cannot develop a good framework for decisions because they don’t know what is happening now.
Financial statements contain vital information. I worked for one CEO who said it best: financial statement data is a strategic weapon that can be deployed as an asset. This data is massively under-used by accountants and clients. Why? There are four major reasons:
1. Business people are busy making ends meet and don’t have the time to analyze financial data.
2. Business people are intimidated by accounting (and accountants) and can’t read financial statements. This is a HUGE part of the problem and we must be fully aware of this.
3. Accountants are so busy making ends meet that they don’t have time to sit with clients and analyze this data.
4. Accountants are afraid to admit that they don’t always know the intricacies of interpreting financial statements. We were trained to do accounting, not necessarily to use the information we produce.
This leaves millions of business people living in a future that may not happen and with little knowledge of what has happened. This is a perfect place for accountants. I recommend giving clients a thirty-minute financial check-up annually, by reviewing financial statements with them. This is not time consuming and will deepen relationships and may generate additional fees.
Here are important elements of these sessions:
1. Explain financial statements in easy-to-understand language. Don’t turn sessions into lectures in which clients may not understand the issues. Balance sheet and income statements don’t mean anything to the average client. Break things down and make sense of the financial numbers.
2. Develop an understanding of gross and net margin management. Most business people don’t understand their importance. Either may drive the business. (Gross margin is sales less cost of sales divided by sales. Net margin is net profit divided by sales). Many business people think increasing sales volume is the key to success. But an increase in sales may decrease profits.
3. Point out simple areas clients can work on. Most businesses are driven by a few pieces of data. If these are managed well, the business does well. Identify these before the session.
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Sessions should be informal and brief. If they go well, you will be viewed as a true strategic partner. If they do not go well, the client will know you care. But your clients will likely be impressed that you took the time to help them. You will also generate additional fees since almost all sessions will lead to further questions, challenges, and work.
