How accountants can talk to clients during a downturn

Peter Knight FCPA, Knight Partners

PETER KNIGHT FCPA 

Knight Partners

Peter Knight believes that his clients’ biggest fear as a downturn approaches is a simple one – losing money.

“It’s the red flag of losing money; losing what they’ve either worked so hard for or put aside. Or even worse, if they actually borrowed money and invested it. Not only have they lost what they’ve invested, but they may still have the debt,” says Knight, the principal of Sydney-based Knight Partners.

Ironically, the fear of financial difficulty can itself lead to more difficulties; feeding on itself in what Knight calls a “self-perpetuating cycle”. He explains that while an interest rate increase or a downturn in business will cause some people to be financially stretched, sometimes they won’t confront the problem.

“It’s this issue of saving face. If they’ve put on the show to the world that they’re successful and they have all the trappings – a nice car, nice house, kids at expensive private schools – then there’s pressure at an emotional level that is almost beyond logic.”

Knight says that accountants, even those who concentrate mostly on compliance, should be proactive and contact their clients to see how they are faring.

“One of the key factors is communication with the clients. Actually finding out: do they have fears?” he emphasises.

“The role of the accountant actually becomes even more important for their business clients.”

“There’s pressure at an emotional level that is almost beyond logic.” Peter Knight

He believes leaders of a firm should provide other members of the practice with guidance on how to deal with fearful customers. The best way to help clients allay their fears, he says, is to keep them informed and to help them put strategies in place in case a downturn hits them.

Accountants need to assist clients with scenario planning, for example, doing a budget of what the future might look like and considering what would happen if sales were down by 10 or even 20 per cent. How would that affect profit? What would a loss mean in terms of costs?

“You run a couple of different scenarios and see what the worst case might look like,” Knight explains.

Listen to the podcast: Customers: one of 7 key ingredients for business success

“Take precautionary action now. Helping people to be in a position where they can do something about it is one of the best ways to allay fears, because they’re putting a strategy in place.”

Accountants can help clients analyse their sales mix and focus on retaining the most profitable customers, Knight suggests. Or advise clients on how to increase productivity and reinvigorate their marketing. One idea is to hold a client workshop, offering advice along the lines of “Five different strategies on how to deal with a downturn”.

“I know they work. In 2008, I ran a number of workshops and we had 10 strategies we could work through to deal specifically with tough times,” Knight says. “You can reach more people that way than going client by client.

“For the client, the worst thing is doing nothing,  then the fear becomes all-consuming. If they can be proactive, take steps to do something about it, people will start to feel better about themselves.”

Clients could also ask for advice on personal investments, but if you’re not a licensed investment adviser, you should avoid giving any specific investment advice.

ROBYN ERSKINE FCPA

Brooke Bird

When clients come to see Robyn Erskine about turning around their businesses, they are often justified in feeling fearful about its health.

“Sadly, particularly in SME (small to medium enterprise) land, often people leave it too late,” says Erskine, a partner at Melbourne-based restructuring and insolvency firm Brooke Bird.

“They come in asking, ‘Can you help us?’, but sometimes the only solutions are liquidation or bankruptcy because they’ve just left it too late.

“However, even in the circumstances where bankruptcy or liquidation are the only solutions – and without a doubt they are one of the toughest decisions a person has to make – they are a step in halting a very difficult time, and the first step in rebuilding that person’s life.”

Erskine explains that when people come to see her, it’s often because of an “intervention” – when their accountant, lawyer or even a creditor has told them they need specialist advice. Indeed, the quality of advice from a business’s accountant can be crucial as tough times approach.

“Businesses really have to keep things tight. They need to make sure they’ve got a great accountant to work with them in monitoring their business; to almost be their mentor.”

Erskine believes that as a good adviser, an accountant could, for instance, say to the client: “You’ve done everything you possibly can, but maybe you’re too close, perhaps you need someone else to have a look at this. Let’s talk to somebody else about what we should or could be doing.”

“If the business is not about to fall over, you can do quite remarkable things.” Robyn Erskine

The key to a successful turnaround is not leaving things too late, she explains. Being able to fund the required changes and having stakeholders, inside and outside of the business, on board are also vital.

Determining a business’s viability is about more than just its financial health. Erskine considers where the business is heading, the strength of the management team, the strength of the market that it’s in, and the future risk and direction of that market. From that point, it’s about putting together strategies to get the business ready to meet those challenges. This can include assessing whether the management has the skills to put in place the necessary changes to meet future requirements.

Sadly, SME owners in particular may be reluctant to seek help early enough.

“People are often in denial, thinking ‘I just have to work hard and longer. I’ll make things right because I have to’,” Erskine explains. “Particularly with SME businesses, the person’s own ego, financial stability, family and wealth are all tied up in the company. If they can’t get it right, it becomes catastrophic in their mind. So they just keep going; they don’t recognise change is needed. Consequently, we sometimes see them too late [to help].”

Yet while many clients leave it too late to get help, for others Erskine is able to deliver better news.

“It is music to their ears because nobody wants to be told their company is failing and there is no hope,” she says. “If the business is not about to fall over, you can do quite remarkable things.”

Read next: How to become your accounting clients' CFO


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September 2020
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