If you are running a business, you probably understand the operations behind it. A bakery owner knows how to craft a decent cupcake, and a plumber knows the cause and cure for a leaky faucet. For most business owners, financial management of their company is less intuitive and seemingly less urgent than these day to day activities that bring in the much-needed revenue.

This is when you should call in reinforcements: your accountant. Most accountants would love to take on the role of your trusted business advisor. The problem is, though, that many business owners do not take full advantage of this professional associate, perhaps because of disinterest in the financial analysis conversation or limited available time. Given the short amount of time you spend with your accountant and given the wealth of information you could be extracting from them, it is important to have a plan in place that allows you—a business owner—to fully utilize your accountant and his or her resources.

Based on our interaction with thousands of CPAs over the past decade, Sageworks recommends the following techniques to help you make the most of the time you spend with your CPA and receive more than tax returns:

1. Be selective and choose the right accountant from the start. If they are to be a trusted business advisor for your company, then you should interview them like you would—perhaps more than you would—a typical job candidate. Before engaging their services, ask questions about expertise and also about their communication style to be sure it corresponds to your operations. You should also agree in advance who the accountant will report to whether or not that will also include board presentations.

2. Meet with them often enough that they know your business, its complexities and your struggles. If you only meet with your accountant at year end, they may not remember the details of your conversation and the details of your business.  Frequency of your meetings should depend on which services you have your accountant perform, but a good starting point is to meet with them once per quarter. The meeting doesn’t have to take all day. Call them now to get in the calendars for an hour or two. These quarterly check-ups may save you time in the long run, if it helps you stay on top of financial organization prior to year end.

3. Prepare some questions in advance. You don’t necessarily have to study each line item of your general ledger ahead of time, but prior to your meeting think of questions you can ask regarding inventory levels, investments you are considering, financing sources, the health of your business compared to peer companies, etc.

4. Submit these questions to your accountant ahead of time so they have ample to consider your numbers prior to making a firm recommendation.

5. Take with you the necessary documentation, especially if this is your first meeting. You should confirm with the accounting firm which documents are pertinent to your visit, but most likely it will include the past two years’ tax returns and financial statements.

6. Draw on their operational wisdom. Unless your accountant is new to the field, he or she likely has insight into the 100+ businesses they have worked with over time.  Their experience has shown them over time what works and what doesn’t work as well in general business.

7. Ask them to assess your business’s internal controls. Being close to the action is typically good because you are better prepared to make an informed decision. But it is possible to be too close especially for internal control development. Processes or checks that make sense to you may be the function of habit rather than best practice, so ask your account to evaluate your current controls and their outcomes.

8. Request some technological consultation. Most likely you are using an electronic general ledger package, but you may not be using it effectively. Encourage your accountant set up your bookkeeping system or make recommendations on how you can enhance its efficiency.

9. Ask your accountant for tips on information organization. If it would help them for you to organize your paperwork or financial files differently, then you may be able to negotiate a fee decrease since they will spend less time sorting and organizing your data.

10. Seek referrals. If you are in the market for a particular non-accounting service, see if your accountant has a contact from their professional network that they would recommend.  Because of the tangential industries, most accounting firms have working relationships with local law firms, financial institutions, as well as all the industries in which they have clients.

What other tips do you have for really making the most of the time you spend with your accountant?

Luca Pacioli, an Italian mathematician and Franciscan friar, is widely known as the “Father of Accounting” for publishing 36 chapters on the double-entry accounting method used by Venetian merchants during the Italian Renaissance. His book, Summa de Arithmetica, Geometria, Proportioni et Proportionalita (which translates, “Everything about Arithmetic, Geometry and Proportion”), was written as a textbook for students in Northern Italy at the end of the 15th century. Pacioli’s documentation of double-entry accounting and ledgers taught entrepreneurs of the day how to conduct business using timely and accurate financial information, and it established the fundamentals of accounting still practiced today.

Since then, the industry has seen further and more ground-breaking developments including the introduction of the typewriter, then computers, and later the internet. With each of these milestones, technology not only impacted how accountants handle financial information but also how they interact with their clients.

With the changing technological landscape, what must accountants do to stay competitive in the future, and how will technology change the future role of the accountant?

1. Increase Value-Add Services to Retain Clients

Compliance work is getting more and more standardized and streamlined due to technological advances. If you can shift time and resources from these commoditized services, focus more on becoming an indispensible advisor. Here are some tips on how to become a trusted business advisor to clients. It is no light commitment and might require a paradigm shift by some, but balancing compliance work and helping clients make strategic decisions to protect and grow their business is the role of the accountant for the foreseeable future.

Craig Weeks, a consultant to accounting firms, shares what he has seen in the industry and what role he thinks accountants should play, “One challenge the accounting field faces today is coming to grips with the incredible amount of financial detail their clients are both receiving and generating. The new frontier for accounting/tax related information services is filtering, assembling, prioritizing and then presenting the most vital data in a format that is readily usable by the management team.”

2. Differentiate Your Firm

It is normal now for the buying process to begin online with a search engine. What makes your firm different from the firms listed ahead of you in search results or from the firms down the street? Do something to stand out when speaking with prospects, and prospects will spread the word. For the initial meeting, familiarize yourself with their industry beforehand, provide something more to take home than your marketing brochure (maybe a one page document with a few areas of focus and strengths), and follow-up with a handwritten thank you note.

Many firms, like WithumSmith+Brown in Red Bank, NJ, have embraced the opportunity to utilize technology to differentiate their overall services to current clients. Justin O’Horo, Senior Manager at WS+B, calls it his duty: “Our responsibilities as CPAs command that we are our clients’ most trusted business advisors and with the abundance of technology solutions available it is critical that we use the right applications to help us maintain that status… [We are] relying on a multitude of additional platforms for the dual purposes of adding efficiency and effectiveness to our required procedures while simultaneously providing value-added service to our clients.”

3. Build an Online Presence

If prospective clients start their buying process online, it is important for your firm to at least be among search engine results. That is difficult, though, if your firm does not maintain a website. According to the 2010 AICPA MAP Survey, 33% of CPA firms still don’t have an active site. To attract new clients, you have to meet prospects where they are—online.

4. Be Conscious of Your Clients’ Time (or Lack Thereof)

Business owners are busy running their business, so be conscious of their time and make things easy for them. Technology can help: (a) Make file transmission less of a hassle by giving clients the ability to connect with you online through a client portal. (b) Provide detailed information on your services through your website, so prospects and clients can easily find what they are looking for. (c) Stay in touch with them proactively and regularly; consider sending out an electronic client newsletter or other regular electronic correspondence. It is also important to gain a business owner’s perspective on how they can make the most of their time with their accountant.

Please let me know if you have seen ways that these four points have helped accounting firms or if you have any other ideas on keeping up with technology.

In 1687, Isaac Newton published a three-volume treatise which revolutionized humanity’s understanding of the physical world.  Philosophiæ Naturalis Principia Mathematica explained natural phenomena so thoroughly and effectively that, three centuries later, high school teachers and college professors still impart its tenets to their students.

Book One of Principia contains Newton’s three laws of motion, which describe the responses of physical bodies to forces acting upon them.  Sir Isaac expressed the first law (also known as the “law of inertia”) as follows: “Every body persists in its state of being at rest or of moving uniformly straight forward, except insofar as it is compelled to change its state by force impressed.”  Whether at rest or in motion, physical objects are heavily inclined to preserve their current status; change occurs only when an outside force acts upon them.

While Newton’s studies were devoted to exploring phenomena in the natural world, the inertia principle certainly applies to human behavior as well.  That is, individuals and organizations tend to resist changing their course until powerful external factors compel them to do so.  In the case of financial institutions, the global credit crisis of 2008-2009 and consequent regulatory reforms present a powerful impetus to change organizational behaviors and processes.

As the economy was expanding at a torrid pace during 2003-2007, asset growth may have been the primary focus of most commercial banks.  Given the considerable loan impairments and business failures subsequently experienced (not to mention elevated unemployment levels), risk management is the topic du jour, and will likely remain so for the foreseeable future.  Outside forces– heightened credit risks and regulatory scrutiny– have caused bankers to reconsider their approaches to underwriting and risk management.  However, one conspicuous form of technological inertia has remained largely unaddressed.

Microsoft Excel is a user-friendly spreadsheet application that is well-suited for an individual or small number of people to process a modest amount of data.  Before they enter the workforce, most bank personnel are longtime users of the product, gaining initial exposure to it during high school and college courses.  Its familiarity and ubiquity (nearly all PCs and laptops contain the application) make Excel a popular choice for managing data.  Spreadsheets can be readily customized by loan officers and other commercial bank users without additional assistance from IT personnel.

Over the past two decades, bankers have become heavily reliant upon Excel for underwriting decisions as well as risk management reporting.  Despite its popularity, the “spreadsheet approach” entails a considerable number of drawbacks and limitations in both endeavors.  Below, we consider the program’s deficiencies as they pertain to loan underwriting and risk management.

General Limitations:

•    Excel is a spreadsheet application, not a database.  Information stored on Excel spreadsheets is not centrally warehoused, rendering it difficult to access via ad hoc queries.  Further, as many spreadsheets contain a fair amount of manually-entered information, data integrity is a perennial concern.  

Underwriting Limitations:

•    While report customization may be advantageous to individual users, processing data in an idiosyncratic manner often becomes a liability for an organization.  If borrower financial data is not centrally stored and readily accessible to multiple users, chief loan officers and risk officers may have great difficulty in verifying that underwriting standards are being consistently applied.

•    Loans made to borrowers with multiple business interests and loans supported by a guarantor require a “global” cash flow analysis.  As Sageworks’ Vimal Patel has noted, proper global cash flow analysis “involves integrating multiple partnership and corporate tax returns, business financial statements, K-1 forms, and individual tax filings.”  Excel is ill-equipped to readily integrate all the pertinent information from these disparate sources and only adds to other common mistakes of global cash flow analysis.

Risk Management Limitations:

•    Excel is not designed to process large volumes of data.  A comprehensive assessment of loan portfolio risk factors requires strenuous computations which cannot be adequately handled by spreadsheets.

•    Although data from other applications can often be imported into Excel, the program is not conducive to easily exporting data to other applications.  Any impediments to data sharing are a major constraint to thoroughly evaluating portfolio risks.

Unlike the inanimate subjects of Newton’s experiments (think falling apples), banks’ courses are not wholly dependent on external stimuli.  Management decisions– especially those pertaining to Information Technology practices– have tremendous effects on profitability and balance sheet health.

As bank examiners and officers become increasingly conscious of the limitations of an Excel-based approach to underwriting and risk management, the demand for alternative solutions will continue to rise.  Undoubtedly, other software applications will soon enable bankers to overcome “spreadsheet inertia” and prudently change their direction.

Are you still using Excel for risk management?  Has it ever caused you any of these, or other, issues?

For more information on the common benefits and underlying risks of utilizing spreadsheets for risk management, download the whitepaper, Regulator Concerns with Spreadsheets in Risk Management.

Benchmarking the financial performance of your business against that of your peers is an important aspect of running and growing your business.  Comparing yourself to your competitors can help highlight trouble areas and can serve as red flags for you.  As Chad Parker, a Partner at Sink, Gillmore & Gordon LLP accounting firm puts it, “Industry comparisons are a valuable part of understanding and improving business performance as they can point out areas that businesses need to take a look at and see why they are performing below the rest of the industry.” 

But, before you find true value from these comparisons, you will need to decide which financial metrics are important to you and understand what they actually mean.  After you complete these two steps, finding quality industry data to benchmark yourself against is the third important step in getting true value from industry comparisons. 

Below are generally the most important financial metrics to focus on when looking at industry benchmark data and a short explanation of what they actually mean.

1.  Net profit Before Taxes Margin

Net profit margin is generally expressed as net profit before taxes in a given financial period divided by sales. Another helpful interpretation is how many cents of profit a business extracts from each dollar it earns in revenue. This is a basic financial metric, but it is the most important.

2.  Liquidity Ratios

There are two fundamental liquidity ratios that should be analyzed jointly. Current Ratio is expressed as current assets divided by current liabilities. This metric shows the company’s general liquidity, but it has some limitations. For example, by including inventory in the calculation, it may provide a distorted understanding of the company’s very short-term cash flow. The second liquidity ratio is the Quick Ratio, which is typically expressed as cash plus accounts receivables divided by current liabilities. Again, the Quick Ratio may not be perfect for gauging liquidity, but it is a useful and popular comparison to pair with the Current Ratio.

3.  Turnover Ratios

There are three fundamental turnover ratios that you should calculate.  Accounts Receivable Turnover, in days, is expressed as accounts receivable divided by sales multiplied by 365 days. It roughly measures the number of days a company takes to turn accounts receivable into cash. Lower numbers are more desirable. The second ratio, Accounts Payable Days, is expressed as accounts payable divided by cost of goods sold multiplied by 365 days. The Accounts Payable Days ratio indicates the number of days a company takes to pay its vendors. Here, higher numbers are better. The third turnover ratio, Inventory Days ratio, is expressed as inventory divided by COGS multiplied by 365 days. The Inventory Days ratio measures the number of days it takes to sell inventory, but it is very specific to your industry. Generally, lower numbers are better.

Download the full whitepaper to access private-company stats for these metrics and read more about where to find quality benchmarks: Benchmarking Best Practices.

The estimation of the Allowance for Loan and Lease Losses has been a part of the financial institution’s accounting processes for years, but it has taken on increased importance over the last several years. Between increased regulatory scrutiny and the challenges of documenting and defending the Allowance estimation to multiple constituencies including the regulators, external auditors, and the board, many financial institutions find themselves overwhelmed with the process of estimating and documenting the ALLL on a monthly or quarterly basis. The ALLL estimation is significant in that regulators are vigilant about ensuring that financial institutions have enough in their reserves, but the ALLL estimation is also significant in its impact on an institution’s earnings and capital.
 
One of the defining regulatory statements on the ALLL, the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses states:
 
The ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports…each institution has a responsibility for developing, maintaining, and documenting a comprehensive, systematic, and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses.
 
Tom Ryan of Turner and Associates, Inc., a bank consulting firm serving clients in the Midwest, sees this in practice, noting:  “Estimating the allowance for loan and lease loss is one of the most important challenges bankers face today, though often the least understood.  Bankers can minimize the inherent imperfections of this estimate by adopting a supportable and consistently applied methodology and providing verifiable documentation of their findings.”
 
Some of the general overarching challenges that financial institutions face with regards to employing this type of comprehensive, systematic, and consistently applied process to their ALLL estimation include:
 
1. The manual, time-intensive nature of the process each month or quarter. For many financial institutions, the process can take several days if not more per month for several of the institution’s finance, credit, and/ or lending staff. Some of the individuals involved in the estimation are high-level executives whose time is at a premium, so the greater amount of time directed towards the ALLL can be a burden. This process is labor intensive, manual, and often prone to error, through the usage of an assortment of Excel spreadsheets, which lend themselves to version control issues and formula errors, amongst other potential issues.
 
2. Keeping up with new accounting standards and regulatory demands that are being placed on the institution. The financial institution must stay current not only with the published regulatory guidance, but also with new accounting standards being issued from FASB, as well as the regulatory demands from the institution’s specific regulators, which may or may not coincide precisely with the two aforementioned sets of standards. 
 
3. Additional reporting and disclosure requirements. In recent years, FASB has continued to issue new requirements through its Accounting Standards Updates. While this often consists of simple reports and aggregation of data that is already being used, it can be time-consuming and places additional strain on limited resources.
 
4. Increased scrutiny on the assumptions used to determine the ASC 450-20 (FAS 5) reserves. This can include questions around the how to appropriately segment the ASC 450-20 (FAS 5) pools, assumptions used for the number of periods of historical data to include for establishment of the Historical Loss Reserve portion of the ASC 450-20 (FAS 5) reserves, and the judgment and defense of qualitative factor adjustments in the assessment of the ASC 450-20 reserves.
 
5. Increased scrutiny around the ASC 310-10-35 (FAS 114) reserves. This includes the appropriate determination of which loans need to be evaluated for impairment under ASC 310-10-35 (FAS 114), determination of whether the loan should be considered “collateral-dependent” and evaluated under the “Fair Market Value of Collateral” method or under the “Present Value of Future Cash Flows” method if the borrower is still expected to make repayments on the loan, the correct assumptions to employ in either method, as well as additional considerations that have been expanded upon by FASB as pertains to Troubled Debt Restructure (TDR) loans that have been modified or restructured.
 
Nelson Reeves from Reeves Risk Management, a firm serving financial institutions in the Southeastern U.S., sums up these challenges by stating:   “Overall, one of the most significant challenges is arriving at an amount in the allowance which both adheres to the accounting and regulatory requirements and satisfies the regulators as to its adequacy.”

What other challenges has your financial institution faced in regards to estimating the ALLL?  What are ways it is overcoming these challenges?

For more information on the common challenges in the estimation of the ALLL and ways to improve the FAS 114 impaired loans calculation, download the whitepaper, Challenges in the Estimation of the ALLL.

Our data shows that the net profit margin of gas stations has been increasing each year for the past four years.  The net profit margin was 0.96% in 2007, 1.24% in 2008, 1.63% in 2009, and 2.70% in 2010. A common misconception, however, is that the gas station owners receive a hefty profit from increasing gas prices. The graphic below displays the breakdown of how your money is actually distributed every time you fill up at the pump.

 Business owners are in need of the following assistance from their accountants:

1.  Help with compliance regarding tax law.

2.  Assistance in preparing financial statements (balance sheet, income statement, and cash flow statement) in a accurate and timely manner.

3.  Need accountants to act as a trusted advisor to help business owners make sense of the financial statements and then advise them on how to make better business decisions using the statements.

This third point is vital.  Business owners need to request actionable analysis of their financials from their accountant so that the owner can make better decisions in running their business.

What else should accountants provide their business clients? 

This list has been updated. Learn more here: The Most Profitable Industries in the U.S.

The most profitable industries over the last 12 months are highlighted below. Legal services top the list. Accountants, lawyers, and healthcare professionals (dentists, chiropractors, and physicians) remain highly profitable as well, all-seeing double-digit profit margins over the last 12 months. Energy-related industries such as oil and gas extraction and mining are lucrative industries as well.

Through its cooperative data
model, Sageworks collects and aggregates financial statements for private companies from accounting firms, banks and credit unions.Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.

For more information on Sageworks’ data, download a sample private-company report.