Client Financial Mistakes

Clients (and accountants) are human whether we like it or not. And as we know, humans make mistakes. Identifying and fixing financial mistakes is a large part of the effort expended by clients and accountants. An analysis of these efforts make up the crux of this article.

According to the AICPA’s Journal of Accountancy, clients can face various financial and business predicaments: overextension, employee problems, customer losses, and even bankruptcy. They also may lack proper management training, and they may procrastinate or overreact when problems surface. That’s when they call their CPAs in a panic. Sadly, clients may see their fortunes diminish if they do not take a more proactive approach to managing their personal or business finances.

The Journal of Accountancy’s report, by Cheryl Meyer, recently provided the following discussion points noting the six most common financial mistakes that clients make:

1. Miscalculating startup costs or personal funds.

It's all too easy for gung-ho entrepreneurs to spend money before they have it. "All that cash goes out the door before they have their first sale," said James Bourke, CPA/CITP/CFF, CGMA, a partner at Withum Smith+Brown in Red Bank, N.J. Individual clients, too, can overextend themselves by racking up debt on credit cards or spending more than they earn.

CPAs can help prevent this problem by collaborating with clients and reviewing their cash flow needs early in the game.  You will be putting your client in a position to be successful," Bourke said.

2. Failing to plan and project.

"A majority of my small business clients operate somewhat by the seat of their pants," causing things to spiral out of control and create emergencies, said Robert Cameron, CPA, member at Hughes, Cameron & Company in Springfield, Ill. Cameron meets with clients quarterly to set them up with an annual budget and "teach them some basic management skills," he said.

3. Buying unnecessarily.

Clients often rush to make business purchases at the end of the year to help alleviate their tax bill, which is a serious misstep. "If you need that piece of equipment, great. But if you don't need that piece of equipment, tax is only a percentage of the game," he said. He explains this point to clients, and they usually understand quickly, so that's an easy fix.

4. Failing to analyze all revenue streams.

Companies often have multiple business lines, and some do better than others. With the help of their CPAs, clients need to dive deep into their operations and review their revenue streams to see which business lines are profitable.

5. Ignoring the human element in mergers and acquisitions. 

CPAs involved in M&A should market their advisory service roles to help address a potential crisis before it starts, he said. "This is something beyond the debits and credits—it is the history of seeing things that have failed and succeeded. What a seasoned CPA brings to the table is the experience of transactions."

6. Delaying a succession plan.

Business owners close to retirement may also wait too long to create a company succession plan. CPAs should discuss this with clients upfront so they are prepared.

In conclusion, by reviewing the most common financial mistakes made by clients and their accountants alike, you can come to have a better understanding of what leads them (and you!) to make such mistakes in the first place. Only after familiarizing yourself with the issues at hand can you work towards developing a successful system towards avoiding future failures.