Reprinted with permission from CPA Practice Management Forum.
No matter how good your kid is at soccer it’s still an extracurricular activity as long as she’s in school and nobody’s paying her to play, right? Helping her see that school comes first is part of your job as a parent.
Part of your job as a change agent in your firm is embracing the idea that the pursuit of growth is an essential part of what you do – not an extracurricular activity.
If you are a leader of a service line or industry, whose purview includes growth and profitability, you’ve got to fully own that role. “I’ll do my best as head of the tax department” isn’t enough. It’s a matter of actively accepting responsibility for a revenue stream and its attendant profitability.
Once that culture shift is in place, it’s all about the nitty-gritty of growth. And that starts with one critical task – financial analysis.
For many CPAs these are dreaded words. Many don’t see the relevance, others don’t want to do it, and others don’t know how to analyze the viability, stability and profitability of a business – in this case their own.
More often than not, they’ll attempt to move on. “Let’s forget financial analysis, and it will go away. Let’s just go do some marketing.” But think about it. Pretend for a moment that you are brought in as the new leader of a company. You wouldn’t barrel into the market with no analysis. The Board of Directors would surely not tolerate that approach!
All of this is especially perplexing in view of the fact that these same CPAs would never recommend that a client embark on a product or service expansion without a comprehensive analysis of revenues and profits.
Much as you would rely on a roadmap to ensure that you reach your destination, financial analysis gives you a comprehensive view of where you’ve been and where you should be heading. It’s the very foundation of building a successful strategy. It also helps avoid random side trips. For example, if your firm is in Wyoming where an oil and gas boom is under way, it might be tempting to conclude that expanding your contractor business is a strategic move.
But a careful financial analysis might reveal that, in fact, contractors are your least profitable buyer group. Where do you go from there? Let the numbers lead you. Does 90 percent of your revenue come from 50 percent of your clients? Or is it the other way around? What is the realization rate of your clients by buyer group? By service? By partner?
Decisions about how and where to drive growth will emerge. For example, let’s say your real estate realization is 50 percent but is responsible for most of your revenue. Health care, on the other hand, shows modest revenue, but a higher realization and growth rate. Armed with data, the once obvious choice may appear less obvious.
Is there an app for this?
There’s no “easy button” for conducting a thorough financial analysis – no app that instantly reveals the required content and data points. What complicates matters even more is that, if you’re like many CPAs, you may never have learned the art and science of financial analysis during your training.
On several occasions I’ve observed an uncomfortable embarrassment factor around this. CPAs realize they need to know and apply this method, but they have no idea how to go about it. Some are naturals and figure it out beautifully on their own. But for others a conversation on this topic yields the unmistakable deer-in-the-headlights look.
If you find yourself in the latter group I recommend finding an expert – perhaps someone already on your staff – who is skilled in Excel pivot tables, and understands financial analysis. (Most MBAs have this knowledge.)
You’ve only just begun
I can’t guess the number of times I’ve sat with partners – successful partners of successful firms – and watched them cringe when I recommend a deep dive into financial analysis.
“But Gale, we’ve done revenue segmentation just as you recommended. Isn’t that enough?” No it is not, thank you. In fact, once you’ve identified the sources of your revenue you’ve just taken the first step in the growth process. Next you have to parse each of those superficial numbers to discover what they reveal and the direction they will lead.
Dig for the data, apply critical thinking, commit to the effort and you’ll discover valuable nuggets upon which to develop your growth strategy!