CPA - Accounting
Firm Marketing Newsletter:
Accountancy practice income risk management
In this issue,
we take a look at risk management in connection with planning
income.
It's a "hot"
topic but I believe this article can bring a new viewpoint to
the subject... and give you a new added-value service to deliver
to your clients, too!
Risk management
as an accounting service
As an accounting
professional, you are advising your clients on risk management.
It is one of
those subject matters where it is sometimes easy to see the risk
but difficult to get the client to understand it - or, difficult
to assess the risk factor with the information available and
thus, almost impossible to form a definite recommendation for
or against.
And if neither
is a problem then the challenges come in attempting to devise
a plan for dimishing and/or ridding oneself of that risk.
Suffice to
say that risk management is a field of challenges.
Risk management
is a combination of knowhow, experience and prediction of future.
Perfection is unobtainable as one would need to be psychic AND
all-seeing to predict every eventuality and counteract it before
the fact.
It could be
argued that risk management is one of those less inviting necessities
of running a business.
Risk management
is not an exact science although it purports to use the principles
of precise measurement and existing facts.
One is, after
all, always weighing potential income against potential loss.
In other than obvious cases, the scales are not tipped clearly
either way; that's the job of risk management.
Clients don't
often realise that you cannot forecast every eventuality of future
problem accurately despite being an accounting professional.
The accountant
or CPA is, however, perfect in one way when it comes to risk
management.
You're the
perfect culprit when something goes awry!
The paradox
here is that the less the client has given you to work with TO
predict IN TIME, the more intently he blames YOU for the problems
created by him in his business activity.
Reversely,
those clients who willingly pay you to monitor the key figures
of their accounts and consult them on monthly basis on your findings
(projecting potentially emerging problems and opportunities),
will NOT consider you guilty of their mistakes in financial planning.
That's because
they HAVE some form of functional financial planning and, with
your help, they have some (often considerable) CONTROL and prediction
over the development of their fiscal year.
He who knows
what's happening and has the tools to influence those events,
is in control... and needs no culprit... and no luck either for
that matter!
Yet the client
who "doesn't want to know" and thus definitely is unwilling
to PAY you for finding out... well, he is upset if you tell him
about some potential (or existing) danger in his business activity
and/or finances.
So when the
inevitable occurs he will then be "surprised" and think
it was all "bad luck." They also tend to think the
accountant a MAGICIAN who can swiftly whisk away problems with
his magic wand.
Well, you know
all this inside out, of course. Risk management is a "damned-if-you-do-damned-if-you-don't"
proposition involving high mental stress.
Sparks fly
and you're sitting on a keg of gunpowder... and thus the mere
mentioning the subject can create explosive reactions in some
clients.
But how about
YOUR risk management when it comes to stabilising your income?
And how could
you combine the two for the benefit of all concerned?
Here's an idea
of how you could service your clients – in fact, a workable
idea for an added value service that is yours to use if you choose
to:
CPA Firm risk
management as a marketing strategy: Minimising the risk of drop
of income
The concept
of "income risk management" is the same abstraction
used in investments, opportunities and expense-related matters,
but here applied to INCOME.
With income,
risk is manifested in two vectors in the theory presented here.
I'm now simplifying the issue and concentrating only on the structure
of clientele and billing (and the nature of assignments).
The first element
of risk involves the NUMBER of MONTHLY income sources that you
have.
The more monthly
income sources, the less the disappearence of any single income
source can affect the total.
The second
element of risk is governed by the SIZE of individual income
sources as compared to the average income sum you get by dividing
your montly income with the number of clients.
If you have
plenty of income sources of which each brings a sum that is close
to the average income per client, your risk is minimal.
Of these, the
number of income sources is the more important one. The risk
factor becomes evident once you ask yourself this question:
How much
would your income — immediate and future — be affected
if your biggest source of income would be lost?
In other worst,
if the worst-case scenario played out and you would lose THAT
client you can't do without... how much would it cut your monthly
income?
Of course,
I'm NOT saying it will. And I apologize for the gut- wrenching
feeling the very idea can evoke.
It's something
we all feel – it's that "fear of losing what you cannot
afford to lose."
My intention
is not to scare anyone but to examine what could be
done to minimize the risks in its power to affect the life of
your clients... or your own, for that matter.
No matter WHAT
the cause of nonpayment or loss of a client – not arguing
whether or not there could be circumstances beyond your control
– how much would that loss of income affect your total income
this month and thereafter?
If you have
50 clients each paying $500.00 a month, then the answer is 2
percent – certainly nothing to keep you awake at nights.
If you have
10 monthly clients, each worth $2,500.00 a month, loss of a client
would create a bigger effect – 10% of your income is gone
and that can definitely offset your budget and finances.
And here enters
the "size of individual income sources" factor. Remember,
the risk denominator was "ANY ONE CLIENT" – unfortunately,
you seldom get to CHOOSE which one you lose, right?
Now, let's
say you have ten monthly clients and ONE of these is the source
for more than HALF of your monthly income. In this example, your
income risk factor would be very high – a whopping,
paralysing 50 percent.
Let me again
emphasize that it is a POTENTIAL risk – but aren't they
all potential before they materialize, in the final analysis?
A risk may
exist and yet not come realization – it may never happen.
Regardless of whether the worst happens, the very existence of
the risk factor can of course make life itself less enjoyable.
But even that
is better than not having a CLUE that a risk even exists... as
I personally came to realize.
I well remember
my beginning days as a hopeful ad agency owner some 20 years
ago. I had landed this dream account... and it kept me and my
small staff SO BUSY that I totally forgot to put any attention
on obtaining additional SMALLER clients to balance this new-found
income source.
In fact, I
wasn't even INTERESTED in those "small, insignificant assignments"
that were readily available - the bread-and-butter bisness as
it's called.
Arrogantly,
I even turned DOWN work that was offered to me...
Everthing was
rosy. It was so EASY and natural to get most of my income from
one client. He gave us lots of work and paid the bills diligently.
But what I
forgot was that a client relationship is not a partnership or
employment. Which I learned the hard way when they appointed
a new Vice President of Marketing, a guy who had his OWN buddies
in the ad industry...
Well, it was
good as long as it lasted. But after the new boss terminated
the account it was PANIC, big time.
If I learned
anything, it was this:
Never, EVER
be satisfied with ADEQUATE income alone. Always make sure your
income comes from NUMEROUS ENOUGH sources
to ensure you won't be faced with income crisis of apocalyptic
measures that threaten the very existence of your business.
Analyze your
income sources, minimize the income risk factor... and work the
market to get new clients even when you feel you DON'T NEED THEM.
And don't turn
off those "boring" bread-and-butter jobs, but accept
them and devise a good way of selling a more involved service
to these guys.
That way you'll
have the security of wide-base income (with low risk) and also
the excitement of new challenges!
One day, you'll
be glad you did... regardless of whether or not the risk materializes.
It's a win-win situation, either way!
Here's the
thing:
Clients are
not forever.
They get into
crisis of their own, they change their minds, the decision-makers
change... things CHANGE.
Time in its
essence IS change and thus, never get lulled into a false sense
of security believing that "nothing changes" or that
all change, by definition, would be positive in nature.
The best way
to look at your clientele is as if it were a RESERVOIR of income
potential... but one that LEAKS ALL THE TIME. Now, this has NOTHING
to do with client satisfaction.
Things just
CHANGE constantly.
It may not
SEEM like a "constant leakage or seepage" because the
shift is usually so gradual – it takes quite some time for
any major decision to develop until the results of it become
know and take their inevitable effect.
It may APPEAR
like it came from out of the blue... but it did develop ("leak")
for months or perhaps years.
Regardless
of HOW well you service your clients, aside from how your income
risks are managed, the reservoir leaks all the time.
To countermand
or "fix" that leak, you need to REPLENISH that reservoir
ALL THE TIME to keep it level – to acquire more income sources...
more clients.
Employing an
inexpensive system to obtain clients on continuous basis will
also automatically minimize your income risk factor.
The better
your profit from these (future) clients, the better your ability
or reserve to absorb unexpected losses.
Now, how can
you combine the two ideas here — offerning your clients
a risk management service that works at their level of understanding
of finances AND ensure that your income becomes impervious to
any sudden changes?
Risk Management
Accounting Service
The key to
creating more viability for your client (and your own firm) while
minimizing the income risk factor is NOT in getting rid of big
clients but in acquiring MORE clients to offset the risk of losing
a big one.
The way you
can achieve that is by offering a service that allows you to
sign on new clients easily for monitoring their finances on monthly
basis so that you become their early-warning system AND their
advisor on how to solve emerging problems and utilise new-found
upward trends in their business activity.
Such a service
exists already and we call it the Monthly Financial Consulting Service.
This "income
risk management" has been included in the MFCS as a value-added
accounting service. And it really offers a way to minimise your
own income risks by helping others do the same!
Neat, don't
you think?
All right,
keep up the good work give the idea of lowering the income risk
factor some thought!
Best wishes,
Harry Kafka
HDK Consultants
Ltd
32 Manning Close
Richmond Square
East Grinstead RH19 2DR
West Sussex, United Kingdom
Tel. 01342-328 116
From U.S: 011-44-1342-328-116
CONTACT
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