End of Financial Year Client Reviews – Creating Value From Value
I recently had a thoroughly thought-provoking discussion about client year end reviews with Alexi Boyd. Alexi is a person of immense talents and skill operating in the accounting and business advice space. Our discussions focused on the value of the review process for clients, particularly in the SME sector. Prior to Jazoodle, the value of regular client reviews was drummed into me in a big way. The power of presenting historical performance data meant huge amounts to our clients. They could then adjust policy or decision making accordingly. They would do this to either reduce risk or capitalise on the opportunities presented. This has got me thinking about these reviews, the value provided, and how important they can be. This then leads onto a very pertinent area and one in which we advocate. That area being, of viewing client performance reviews as a continuum, rather than a static. Thus, not a snapshot in time, but part of a wider process of adding value to your clients.
Client Reviews Context
Before doing this, let’s get some context. Recently Xero released research that concluded that the majority of SME clients actively want greater business advice input from their advisors. In their own words, SMEs wanted their advisors to be more like “Business Pilots”. Equally, advisors that actively added greater value to their clients, earned significantly greater revenues per client, than those that didn’t.
There are some very good reasons to have a review process in place, not least that it:
- Creates client “stickiness” with you and your business
- Starts to build trust with your clients
- Helps carve out greater client revenues
- Upskills your clients in understanding key areas of focus and potential “danger areas” associated with their business
- Starts to manage time constraints better – leading to greater proactivity and fewer reactionary calls for help
- Creates a sense of responsibility for being proactive in resource planning with the SME owner, under your guidance and advice
An iterative framework
I could go on further, but think you get the gist. There is arguably a moral responsibility to ensure that SME clients are aware of all opportunities and risks associated with their business and investment. The next question is, what is relevant to clients in reviewing their businesses, and where should it start and end? This seems a simple one to answer. This should logically start at the beginning of the last financial year, and end at the end of this one. This brings up the same question as earlier. Should client reviews therefore only be a snapshot of performance at this particular time? Thus highlighting only the current opportunities and risks? You could argue strongly, yes, in you have a defined the start and end point. Having said this, businesses do not normally, if they are going concerns, have a convenient start and end point! Also, what about the underlying data? Data which is not readily seen in financial statements at a singular point in time?
Consider this, that a client review, when done properly, is an ongoing review of performance, business strategy and wealth generation. This is an ongoing process, until such a timethat… it isn’t!
Therefore, the framework for annual / regular reviews should run something like this:
For me, there is an obvious first question that needs asking. It is: “Mr/Mrs SME Owner, What are your key objectives for your business in the next 1-5 years? Minimise taxes? Expansion? Exit?”. Without the answer to this question, I’d argue, it’s impossible to conduct a genuinely useful client review.
With this in mind, the review should follow the objectives , almost as a guiding template. But wait, we have only previously talked about the review of financial statements and performance, and perhaps tax liabilities. We discussed earlier that there is potentially a moral responsibility to understand business performance data in detail. In understanding its performance in multiple areas, and its underlying trends, and what this means for future years. Understanding the underlying data within a company can produce much more meaningful insight into how that company performing. Not only how well performing, but also which direction that company is likely to be heading. So what KPIs could be useful and are consistent with the stated objectives? And where should you get these from in a timely fashion? Strategic KPIs could fall into one of 5 key areas:
Gross margins, net margins, underlying cost structures etc.
Headline and Acid Test, Interest coverage etc.
Receivables Collections Periods, Stock Sales Periods, etc.
Returns on Assets, Asset Utilisation etc.
Company Health, working capital ratios
Financial Make Up
Gearing / Leverage
Client reviews – a case study
In reviewing your clients, can you show them their liquidity position and how this has behaved over time? What will the situation be next year? For instance, should revenues decrease by 2%? Are there any underlying signs that liquidity may be an issue during the next financial year? How does this measure up to other companies within your portfolio, or industry?
Jazoodle’s application, which integrates with Xero, will generate up-to-the-minute KPIs and will generate meaningful insights within seconds.
In this example it appears that liquidity is being managed well and cash is not over or under exposed. However, look deeper into the indicators, ie the quick ratio (the more immediate cash needs and demands of a business.) There could be issues should creditors change their collection policies, or the bank demands an settlement of a short-term loan. This example implies that the company has large amounts of their current assets as stock/inventory. This is therefore not highly liquid should instant cash reserves be needed. This is illustrated further by the Days Sales in Inventory ratio. This shows more than 120 days’ of stock is carried, and the assertion confirmed:
Therefore whilst the balance sheet may look strong, there may be underlying forces at play creating risk in a business. Our argument therefore is that there is great value to your clients in highlighting these.
Client reviews – A Journey
Thus, in reviewing a business, a quick look at the underlying numbers should be a must for all advisors. Having the ability to forecast next year’s headline and underlying numbers is the next extension of this. Luckily enough, Jazoodle is designed to deliver both of these.
We’ve established that client reviews are not a singular process. More so one where the objectives of the business are evaluated against its performance, historical and future. The future advice focuses on where additional revenues can be generated or assets maximised.
The final question is that by viewing client reviews as an iterative process, should year end reviews be chargeable? In my former life, a client review is not chargeable, but something that will lead onto greater revenues. Now, not all clients will want or take up a paid review, which is an equally valid argument. An argument for recovering costs associated with the review – your time and skill is equally valid. The counter argument is how many clients, or what percentage of them, do you sit down with and formally review? Is this lesser number because the client does not want to pay for a formal year-end review? If this is the case, would you improve the numbers and future advisory revenue opportunities, if these reviews were free?
Jazoodle has been designed to take the sheer hard work out of client reviews, and the tracking of performance. Each client’s dashboard is populated in minutes and highlights a vast array of KPIs. What’s more, it produces an indicative valuation, and provides a modelling and forecasting tool to help predict the future. What’s more, you can delegate the building of client dashboards to your own admin team – Jazoodle doesn’t charge per user! You therefore use your time and skills for interpreting the insights, therefore building revenue generating conversations with your clients.
If you would like to assess how implementing an ongoing client review system into your practice will increase revenues, we have a very handy calculator for you to input your basic practice assumptions and see just how profitable such as process could be. As an illustration, let’s assume:
A 6 partner practice with an average of 300 clients per partner. Assume 5% of your clients require a business valuation every year. 13% of your clients are currently ongoing advisory, and you have a margin of $100 on your time.
Total practice profit in this case is over $1.6 million p.a. based upon this scenario. This assumes that you charge out the cost of Jazoodle at its retail price. We also assume that you benefit from the volume discounts Jazoodle gives its advisors. Pretty compelling – but please use your own assumptions and practice data to establish what it would mean to you.
Andrew Paton-Smith is the founder of Jazoodle.