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Personal Financial Planning

Fundamental Financial Planning Knowledge & Skills

Clients can face various financial and business predicaments: overextension, employee problems, customer losses, and even bankruptcy. They also may lack proper management training, and may procrastinate or overreact when problems surface. Then they call their CPAs in a panic. Unfortunately, clients may see their fortunes dwindle if they do not take a more proactive approach to managing their personal or business finances.

We tapped five CPAs to identify the top blunders they see clients make, and offer ways to prevent these problems from surfacing. Here is their list:

Miscalculating startup costs or personal funds. It’s all too easy for gung-ho entrepreneurs to spend money before they have it. They buy equipment and supplies, renovate, and pay employees. “All that cash goes out the door before they have their first sale,” said James Bourke, CPA/CITP/CFF, CGMA, a partner at WithumSmith+Brown in Red Bank, N.J. “They underestimate the capital needs and cash flow to get the business off the ground.” Individual clients, too, can overextend themselves by racking up debt on credit cards or spending more than they earn. Clients often approach his firm after they have burned through cash and are in trouble, largely because they failed to forecast.

CPAs can help prevent this problem by collaborating with clients and reviewing their cash flow needs early in the game. “If you are a trusted adviser, they will consult with you about every single thing they are doing. You will be putting your client in a position to be successful,” Bourke said.

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. Even entrepreneurs who pay close attention to their books aren’t always prepared to analyze their business. Cameron meets with clients quarterly to set them up with an annual budget and “teach them some basic management skills,” he said.

Clients also could avoid many difficulties if they strategize and project. “The most common mistake we see with clients is lack of planning,” added Don Murphy, CPA, CGMA, managing member of Barfield, Murphy, Shank & Smith in Birmingham, Ala.

For example, clients often do not set five- or 10-year targets, but rather focus on today. “If they were to step back and say, ‘Here are my goals, and what’s my road map to get there?’ they could shield themselves from some of these financial pains and mistakes,” said Kevin Kruggel, CPA, CGMA, partner at Kruggel Lawton CPAs in South Bend, Ind. Clients don’t always have a capital budget to improve their business and don’t anticipate necessary changes in their business model or customer base, resulting in bankruptcy or liquidation. “As a CPA, the biggest thing we can point out is that you have to spend time working on your business—not just working in your business,” he added.

Buying unnecessarily. Cameron calls this blunder, “Letting the tax tail wag the dog.” 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. “They may never have been exposed to that idea,” he said. “The real cost of buying something is not in the dollars you laid out that day—it’s what you can’t buy because you spent that money already.”

Failing to analyze all revenue streams. Companies often have multiple business lines, and some do better than others. But if there’s an economic downturn, problems can arise. 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. “Clients need to jump on these things early,” Bourke said. “The CPA has to be the client’s advocate … and keep in constant communication through the entire year.”

Ignoring the human element in mergers and acquisitions. Sal Inserra, CPA, managing partner for the Atlanta office of Crowe Horwath, works with corporate clients who have unknowingly disregarded one of the most important aspects of M&A: people. Instead, they concentrate on the monetary details of the transaction. Board members often don’t mesh, and things fall apart since expectations were never outlined, inevitably hurting the bottom line. “Those [mergers] have created the biggest financial blunders that I’ve had to deal with in my career,” Inserra said. “There can be political problems inside, so all of the goals to streamline the organization didn’t bear fruit, and as a result it becomes very costly.”

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.”

Delaying a succession plan. Business owners close to retirement may also wait too long to create a company succession plan. “You can’t decide in six months you’re ready to sell your company,” Murphy said. CPAs should discuss this with clients upfront so they are prepared. “We tell our clients if they can give us five years advance warning, we do a much better job than if they give us a year,” he noted.

Cheryl Meyer is a California-based freelance writer. To comment on this story, contact Chris Baysden, senior manager of newsletters at the Association of International Certified Professional Accountants.