Don’t assume that business owners understand their financial statements
It can be easy sometimes for financial professionals to assume that their clients understand their annual financial statements but, really, we still come across those who don’t.
Confession – we had a difficult meeting recently. We were working for some new clients who had a different accounting business looking after their tax returns and financial statements. We had been introduced to them to provide them with investment advice and they also asked us to help them arrange a loan for the purchase of a new family home.
Their previous accountants had been family friends and their accountants for 15 years. While the clients appreciated our efforts for their accounting work, they felt they couldn’t leave this other accounting business and they wanted to stay with them out of loyalty even though they wanted and loved our advice and service offer.
The profits in their business had been falling over the past two years. When we made a loan application, even though it met the serviceability requirements, unfortunately, the bank was concerned about the deterioration in profits of the business and so did not approve the loan.
This was bad news we had to deliver. Fortunately, we had access to the clients’ Xero business account and were able to have a look at what was going on in the business. We printed off a comparative Profit and Loss Statement showing the annual income, expenditure and profit for the last four years. The most recent year had lower revenue and lower profits than three years ago, and this was obviously very concerning.
We met with our clients and explained the bad news to them. We also explained the bank had major concerns about the deterioration in their business profits.
To our surprise (and shock), the clients seemed very unaware that things have been going backwards in their business. We gave them a copy of the comparative Profit and Loss statement that we prepared and explained things to them including the change in revenues over the last four years, the change in gross profit over the last four years and the changing net profit of the last four years. The net profit had come down from $485,000 three years ago to an estimated $115,000 in this current year.
The clients were very concerned.
Here is the thing: One of them said, “We have never seen anything like this but this is the advice that we have always been looking for, the advice we’ve been wanting to receive from our accountants.”
They looked at each other and without any prompting added, “We want you to take over immediately as our accountant. You’re the first person that has explained these things to us and helped us to actually understand what’s going on in our business.”
Naturally, we are very happy to assist with their financial affairs. This got us thinking about how many other business owners have little or no understanding about their business or farm and what is really going on.
This has made us redouble our efforts to ensure our clients understand the basics from their Financial Statements – just a simple change from year to year of revenue, gross profit and net profit. Add to that looking at the Balance Sheet – cash position, how much in GST is owed, whether PAYG withholding and super and accounts payable have been increasing or decreasing over time.
