As the economic disruptions triggered by the COVID-19 pandemic continue, business owners are bracing for more economic pain. Companies are confronting the possibility of having to continue to make tough decisions in order to keep operations afloat.
CPAs are knowledgeable about their small business clients' financial conditions and emotionally removed enough from the organizations to help business leaders see what they often would rather avoid — that employees may need to be terminated, furloughed, or have their pay cut in order to ensure the business's survival. CPAs are further positioned to advise clients to pare back their operations and eliminate underperforming business segments in order to ensure long-term viability.
Here is some advice on how to have conversations with clients about these difficult topics.
Frame the conversation. For most small business owners, staffing decisions aren't simply a math problem. They often develop relationships with their workers, get to know their families, and spend time with them outside of work. It can be difficult for decision-makers to recognize when the time has come to reduce payroll expenses through furloughs, layoffs, or pay cuts. CPAs must broach these conversations with sensitivity and tact.
Travis Miskowitz, CFO advisory manager with Wiss & Company, a CPA firm based in Florham Park, N.J., recommends taking an empathetic approach.
"These conversations are never easy, and the best thing you can do is ask your client lots of questions and listen carefully," he said. "Business owners are more amenable to tough advice when they feel that you empathize with them and truly understand their situation."
Tom Wheelwright, CPA, the CEO of Tempe, Ariz.-based WealthAbility and author of Tax-Free Wealth, always asks his clients' permission to have a tough conversation.
"My clients appreciate it when I ask them for permission to proceed with a tough conversation because it gives them a choice," Wheelwright said. "When you give them this choice, they always say yes. They appreciate that you recognize this issue is personal for them."
Be proactive, and help your clients do the same. Many business owners, understandably, would rather avoid dealing with recession-related challenges in the hope that the problems will resolve themselves. It is incumbent on CPAs to take proactive approaches to difficult conversations with clients.
"Sometimes my clients need a nudge in order to get the ball rolling," Miskowitz explained. "As CPAs, we have access to all their data, but we don't have the same emotional attachment to the business. We are therefore positioned to be the first to raise the subject of tough personnel decisions."
Miskowitz said that he prefers to conduct these conversations with his clients over Zoom rather than via email, which he feels lacks the human touch. "It is easier to empathize with your client when you can see each other's faces and they can see that you have their best interests at heart."
On these Zoom sessions, Miskowitz likes to use "journey maps," an illustrative tool that outlines various outcomes of the choices available to the client. "It is much easier for the client to understand their strategic options when you use illustrative tools," he said.
CPAs should encourage their clients to adopt a proactive attitude, Wheelwright said.
"In times like these, inactivity is the death knell of an organization," he said. "Acting early and decisively, in many ways, is more important than the actions themselves."
According to Wheelwright, the initial minor decisions help business managers adopt the mindset necessary to examine their financial condition and make more significant and difficult decisions.
Identify early indicators. Vigilant CPAs should be on the alert for early indicators of financial challenges to their clients' operations. They can then enable their clients to act quickly and minimize the damage to their organizations.
According to Rob Premselaar, CPA, senior manager at Mach & Associates in Elmwood Park, N.J., the most critical early indicator of financial hardship is cash flow issues. "Now, more than ever, I tell my clients to pay attention to cash flow," Premselaar said.
He recommends that businesses review their cash flow more frequently and with greater care during challenging economic periods.
His own process begins with constructing a financial analysis presentation that tracks his clients' financial trends over time. He then sets up a Zoom call to discuss his findings. Premselaar always sends his clients the presentation as well.
"It is hard to understand numbers just by listening," he said. "Looking at the same information together really facilitates the conversation."
Premselaar reviews the analysis with the client point-by-point to make sure they understand how he arrived at his conclusions.
Wheelwright urges clients not to rely on their accounts receivable.
"If the income statement doesn't match the cash flow statement, receivables can't help you," he said. "If you observe your clients' cash flow slowing, encourage them to ask their clients to prepay."
Other early indicators of trouble, Wheelwright said, include a reduced gross profit ratio, decreased inventory turnover, and above-average aging receivables.
Provide the unvarnished truth. Ultimately, the role of the CPA is to analyze their clients' data and offer an unflinching assessment. While it can be difficult for business owners to receive negative news about their business operations, CPAs do best by their clients by being as honest as possible.
"We are our clients' trusted advisers," Miskowitz explained. "As such, we need to sit down with them and provide an honest assessment without sugarcoating anything."
That means walking clients through potential scenarios and helping them decipher the best route ahead for their business.
"What business owners fear most is uncertainty, and CPAs have the ability to reduce that uncertainty and plan for the future," he said.
One of Miskowitz's clients is a husband-and-wife team who manufacture specialty products for the airline industry. According to Miskowitz, their business was decimated by the COVID-19 pandemic. Miskowitz was upfront with them about their severely reduced cash flow, and he and the client were able to quickly move on to developing an action plan for the future. In this client's case, the strategy involved analyzing the costs and benefits of the second round of Paycheck Protection Program (PPP) loans and the employee retention credit, both programs under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.
In order to reduce uncertainty, CPAs need to approach their clients' performance as if it were a medical diagnosis.
"CPAs are financial doctors," Wheelwright said. "When doctors diagnose an ailment, they have an ethical obligation to accurately identify health issues, even if it is difficult for their patient to hear. CPAs have the same obligation to their clients."
Encourage business continuity. Owners often harbor emotional attachments to their businesses and employees and are therefore vulnerable to making decisions that are detrimental in the long term. It is the CPA's role to provide the dispassionate advice that may be difficult to hear but that can help ensure their businesses survive.
Business owners sometimes need the reminder that their business's survival comes first, Premselaar said.
"If a business can't sustain current levels of operations, it cannot provide future levels of benefit," he explained. "Businesses need to be able to make informed decisions about whether to run leaner by cutting pay."
That allows businesses to survive the difficult times, he said.
"Business owners are not doing anyone any favors by going down with the proverbial ship," Wheelwright said. "Sometimes clients need to be reminded that the best long-term strategy is to accept the necessity for some short-term pain."
Tough conversations between CPAs and their clients are a certainty in the current economic environment. In a respectful and honest manner, you can help your clients identify early indicators of challenges ahead in order to ensure their survival and future growth.
Accounting firms can prepare and process applications for the PPP on the CPA Business Funding Portal, created by the AICPA, CPA.com, and fintech partner Biz2Credit.
AICPA experts discuss the latest on the PPP and other small business aid programs during a biweekly virtual town hall. The webcasts, which provide CPE credit, are free to AICPA members. Go to the AICPA Town Hall Series webpage for more information and to register.
The AICPA's Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA's coronavirus resources page or subscribe to our email alerts for breaking PPP news.
— Joshua Wiesenfeld, CPA, is a financial investigator at Labaton Sucharow LLP, based in New York. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.