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Article: Using Economics to Start an Accounting Conversation

Using Economics to Start an Accounting Conversation
Dr. Bill Conerly, Conerly Consulting LLC
October 2011

Many accountants would like to be more than tax preparers and auditors—they want to help their clients better operate their businesses. Consulting services offer greater revenue opportunity, off-season work, as well as greater satisfaction for accountants. Yet it’s not always easy to start the conversation about using an accountant’s knowledge and experience to help a company perform better.

The economy can help start the conversation. It’s always changing, and if one looks beyond the raw data and the political commentary, there’s always something about the economy that accountants can use to help businesses be more successful. Here is the first of several ideas about conversation starters that may well lead to more useful work for accountants.

Economic contingency planning should be a regular activity at most companies, at any stage of the business cycle, and it’s a great way to start having conversations about extra value work. Business cycles come and go, and economists are not very good at predicting the next turn. Start by sending your client some recent news, such as the Wall Street Journal report that a survey of economists shows a 30% probability of recession next year. The economists may argue among themselves whether the true figure is 24% or 39%, but no one doubts the possibility of a recession next year.

Now throw to your client an actionable idea about how to handle the risk. For example, last May Fortune ran an article about Caterpillar’s great success coming out of the last recession. The key, according to the article, was Caterpillar’s contingency plan for a recession. When the downturn came, company managers knew exactly what to do and did it promptly. They are now outperforming those who dithered and stumbled during the early months of the recession.

Now that your client knows about the risk, and knows that there’s a way to mitigate it, all that’s left is for you to help the client with the process. The final plan must come from the client, but an experienced accountant can be a guide to the essential issues that need to be addressed. Thinking through a company’s financial statements, it’s obvious that the client should address loss of revenue, the need to cut expenses, the potential for higher bad debt, possible ballooning of inventories, and so forth. (After you make up your own list, you might want to check it against the items mentioned in my book, Businomics. If you find I’ve left something out, shoot me a note.)

The best economic contingency plans reflect the texture of the risk. As I’m writing (October 2011), the greatest risk to the American economy comes from Europe and the possibility that their debt crisis will trigger a Continental recession, leading to a double dip here in the United States. The second greatest risk comes from Asia, where both China and India are trying to tame inflation and could well go overboard—or not do enough now, and have to do far more inflation-fighting next year.

At other times, the economic risks will lie in different directions, such as construction, consumer spending, or business capital spending. Read some articles in the business press to learn what the economists are currently worrying about.

Economies surprise us on the upside as well as the downside. Just as every company needs an economic contingency plan for recession, they also need a plan for good times. I call that an economic recovery assessment. Most managers think they are ready for sales to pick up, but thinking through the operations that are reflected on the financial statements will identify areas of concern. Sales should turn up in a boom—is the sales force energized and engaged, or understaffed and discouraged? Purchases of materials will increase with production—are vendors able to deliver on a timely basis? Labor expense will rise with production, if people with the right talent can be found. Helping a client think about these issues will lead to some easy advance steps that can help the company thrive. For example, if finding capable employees may be a problem, the managers can start looking early. They don’t have to pull the trigger and hire anyone early, but they can start looking for good candidates.

All too often business leaders say that they can’t manage the economy. That’s true, but veteran accountants have seen some companies weather economic storms well, others not so well. Having the client’s ear as a trusted confidant, it’s the accountant’s obligation to help the client find the best path forward. It only takes a cursory knowledge of economics to begin the conversation about that path.

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