In uncertain times, our clients need to look forward with a variety of scenarios in mind. Accounting firms that provide predictive analysis will maximize the chances of survival for their clients.
In our last post, we discussed a model for accounting firms to move up the value chain by providing a higher level deliverable than standard reporting.
The outputs we deliver can be broken down into four categories:
- Descriptive Analytics
- Diagnostic Analytics
- Predictive Analytics
- Prescriptive Analytics
In this article, we’ll take a look at the services with the highest level of value: Prescriptive Analytics.
Make sure to sign up for our webinar on May 26 at 2:00 p.m. Eastern Time, "Using Jirav to go from CPA to CFO and make more 💰💰💰," presented by Blake Oliver. You can register here.
Providing Direction with Predictive Analytics
Isolate Key Business Drivers to Build the Model
We’ve asked our client what their goals are. You did have that important conversation, right?
This is exactly what business owners are looking for from their CPAs. According to the Illinois CPA Society, “a recent survey asked business owners what they would want most from their CPA if they had a magic wand. ‘Profit improvement’ and ‘strategic planning’ were among the top answers.”
Now let’s talk about how to help them get there.
Key business drivers are the levers
A business is like a machine. Each team within the business is a set of gears. The gears are controlled by a range of levers. When we pull the levers in the right combination to get the gears turning in unison, they move the business forward.
To design a machine that gets us where we want to go, we need to understand how all those gears fit together. We also need to understand what those levers do when we pull them. This is tricky because the levers are not independent — pulling one may affect how the others behave.
In this analogy, the levers represent our key business drivers. Drivers are the specific, quantifiable actions we can take that will have a material impact on the financial accounts or other drivers. Outputs are the result of relationships between drivers and the financials, which themselves can be drivers of other outputs.
The drivers will impact everything else in the machine
When you program all your drivers, you’ll find that one change creates a waterfall effect, enabling you to see the impact of pulling a single “lever” on your entire financial model and projection.
For instance, total customers drives sales, and sales drives revenue. An increase in sales drives the hiring of new customer support and/or warehouse workers. And the percentage of sales on credit determines our credit card processing fees. Going backward, we may determine that advertising spend and referrals each drive customer growth.
Identifying drivers and their relationships is the essence of financial modeling, which allows us to project into the future systematically. It allows us to forecast important figures for our clients, such as incremental revenue per sales rep or gross profit per new operations hire.
Determining individual drivers isn’t complicated, but putting them all together can be a challenge. Even a simple business can have hundreds or thousands of drivers incorporating both financial and operational data. Building a model from scratch in a spreadsheet can take days of writing formulas. Maintaining and updating can take hours, and mistakes are hard to catch.
As an example: Your firm supports an e-commerce business where Google Ads produces the majority of its customers. Their Ads spend drives orders, sales, need for customer success and operations staff, as well as overhead (benefits, payroll, etc.). You can connect all of these drivers so that when you change your Google Ads spend, you’ll see how that change impacts the rest of the business over time.
Creating dependencies in your financial model allows you to change a single assumption and see how that change waterfalls through the rest of your model.
Help your clients navigate uncertainty with financial modeling
These predictive measures are crucial today as clients need help cash planning through a variety of scenarios.
Make sure to sign up for our webinar on May 26 at 2:00 p.m. Eastern Time, "Using Jirav to go from CPA to CFO and make more 💰💰💰," presented by Blake Oliver. You can register here.
Author Bio: Blake Oliver, CPA, is an entrepreneur, accountant, writer, and speaker who specializes in cloud accounting technology. He has been named a Top 100 Most Influential person in the accounting profession by Accounting Today and a “40 Under 40” by CPA Practice Advisor. He is the director of marketing for Jirav and co-host of the Cloud Accounting Podcast, a weekly news round-up at the intersection of accounting and technology that is also the #1 podcast for accountants and bookkeepers in the world.