Help Your Accounting Clients Grow Their Companies 30% Faster
Your small business clients are entrepreneurs at heart and are wearing a million hats, doing everything from ordering inventory and handling payroll to cleaning up their shop. They’re passionate, dedicated and constantly worrying about their business, but have too many things on their plate. Many of them are fearful of financials and don’t know what they should track, or even how they should track it.
As an accountant, you’re in the position to make sure your clients are aware of their full financial picture. After all, they hired you to manage their books because they trust you and value your opinion. By helping them track key financial metrics and catch problem areas they might not otherwise have noticed, you put yourself in the position to form a year-round strategic partnership.
Most small businesses are failing to accurately track gross margins, accounts receivable, and industry specific revenue or expense drivers, which make a huge difference to the bottom line. Without an understanding of these metrics, your clients put their business at risk. Remember, you will need to help them understand how to track the metrics, as well as review their accounting of these metrics, to make sure they are tracking them correctly.
Here are 3 metrics you should be using to help your client track:
- Gross margins. Your clients should be tracking their gross margins and comparing them to industry standards. By understanding whether they are on par, above or below industry standards, small businesses can know whether their COGS (cost of goods) and pricing is on track, or whether they need to dig in and change their pricing, or try and manage their COGS better. Think of a business that sells inventory; if they are getting bad prices from their vendors or haven’t shopped vendors as much as they could, they could either be overpaying for their inventory or pricing their products too low, leaving money on the table. But, be warned … gross margins that are much higher than industry average may be due to improper accounting of all COGS. You are going to have to audit your small business clients’ COGS and make sure that they are following industry best practices when tracking and allocating their COGS. Ensure that they understand all the COGS and put them into the COGS line, making sure they don’t end up in general expenses.
- Accounts Receivable. Yes, this one seems obvious, something small businesses should already be tracking. They don’t, however, and even when they think they do, they often don’t track AR correctly. When I ask a business owner what their AR days are, I almost always get the same answer … “30 days.” When I ask them how they know, they tell me, “It’s what it says on the invoice.” You know you have heard the same thing, and it’s time for you to step in and help your client understand their true AR days. Make sure to compare their AR days to industry averages, and find out whether you also need to help your client come up with a better AR collections process. Most small business owners don’t have an AR collections process in place, and would welcome some help tightening up. Collecting money two weeks faster could mean the difference between surviving and going out of business. You understand the importance of collecting money and getting the cash in the bank, yet this detail is often missed by small business owners. Poor AR collections are a major reason for small business failures.
- Industry-Specific Drivers. The good news is that most of your clients know what these drivers are. Here are a few examples.
- A delivery business tracks gas as a key driver. As gas prices fluctuate, a business can go into the red if they don’t adjust their pricing or understand the effects of the fluctuating gas prices.
- A hair salon should be tracking revenue by service and the products they sell. A healthy hair salon should get 30% of their revenue from product sales.
- A dentist needs to carefully track and understand his or her lab costs. He or she needs to make sure they make money on anything that goes to labs, and that they are charging correctly and getting reimbursed by insurance in the best possible way. They may want to think about bringing lab equipment in-house, but without good tracking of their lab costs, this decision will be hard to make.
Talk with your small business owners. Ask them what one thing in either revenue or expenses they obsess about. Most likely, that thing is the biggest driver in their business. Help them make sure they are tracking it correctly, and know what to do with the information they have about that metric.
Small business owners need to track all of their key metrics in order to experience long-term success. Without an understanding of what normal and healthy fluctuations in their business’ financials look like, it’s difficult for your clients to spot problem areas quickly, and fix them before they get out of control. This is where you can step in as their accountant and serve as more of a strategic partner. Create processes and offer technology that will help your clients embrace tracking, pushing their business to the next level. Once you form that strategic partnership with your clients, you’re likely to continue working with them for the long haul.