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CPA INCOME RISK MANAGEMENT

Written by: Harry Kafka

Article Overview: A very basic but practical way of looking into risk management in terms of quantity of clients. This could be a way to a new added-value consulting service as well for your accounting practice...

CPA INCOME RISK MANAGEMENT

RISK MANAGEMENT FROM A NEW VIEWPOINT

As an Accounting Professional, you are advising your clients on risk management. It is one of those subject matters where it is sometimes easy to see the risk but difficult to get the client to understand it - or, difficult to assess the risk factor with the information available and thus, almost impossible to form a definite recommendation for or against.

Risk management is a combination of knowhow, experience and prediction. It could be argued to be one of those less inviting necessities of running a business. If there's one thing that I do know for certain it is that perfection does not exist in risk management, as many of us have yet again relearned at the onset of this most recent economic downturn.

It is easy to get caught by surprise.

Clients can expect psychic powers of you (demanding an absolute and accurate forecast of results from future actions and developments that THEY, not you, will be responsible for!) OR only want to hear that their idea is perfect... and get upset if you warn about the risk you see.

Risk management is a "damned-if-you-do-damned-if-you-don't" proposition involving high mental stress. Sparks fly and you're sitting on a keg of gunpowder. No wonder that mentioning the subject can create explosive reactions.

Here's an idea of how you could service your clients – in fact, a workable idea for an added value service that is yours to use if you choose to:


INCOME RISK MANAGEMENT

The concept of "income risk management" is the same concept that is used in investments, opportunities and expense related matters.

The same principles can be applied to INCOME.

With income, risk is manifested in two vectors (in the theory presented here, that is).

The first element of risk involves the NUMBER of MONTHLY income sources that you have. The more monthly income sources, the less the disappearance of one income source can affect the total.

The second element of risk is governed by the SIZE of individual income sources as compared to the average income sum you get by dividing your monthly income with the number of clients.

If you have plenty of income sources of which each brings a sum that is close to the average income per client, your risk is minimal.

Of these, the number of income sources is the more important one. The risk factor becomes evident once you ask yourself this question:


HOW MUCH would your IMMEDIATE income be affected if your biggest income source would be lost?


Of course, I'm NOT saying it will. And I apologize for the gut wrenching that this thought can cause. We all have that "fear of losing what you cannot afford to lose" nightmare sometimes.

My intention is not to scare anyone but to examine what could be done to minimize the risks in its power to affect the life of your clients... or your own, for that matter.

No matter WHAT the cause of nonpayment or loss of a client – not arguing whether or not there could be circumstances beyond your control – how much would that loss of income affect your total income this month and thereafter?

If you have 50 clients each paying $500.00 a month, then the answer is 2 percent – it won’t keep you awake at night. If you have 10 monthly clients, each worth $2,500.00 a month, we’re talking a 10% sudden loss of income here and it will certainly be felt.

And here enters the "size of individual income sources" factor.

Remember, the risk denominator was "ANY ONE CLIENT" – unfortunately, you seldom get to CHOOSE which one you lose, right? So think with Murphy’s Law... the worst scenario.

So, if you have ten monthly clients and ONE of these is the source for more than HALF of your monthly income... your income risk factor is extremely high – 50 percent.

Let me again emphasize that it is a POTENTIAL risk – but aren't they all, in the final analysis? A clearly understood loss is not a "risk" but a certainty, right?

A risk may exist and yet never become reality. But regardless, the existence of the risk factor will make life less enjoyable. You’ll always have that “what if” at the back of your mind...

But that is still WAY better than having NO CLUE of risk existing, as I personally learned.

I well remember my beginning days as a hopeful ad agency owner some 25 years ago. I had landed this dream account... and it kept me and my small staff SO BUSY that I totally forgot to put any attention on obtaining OTHER clients. In fact, I wasn't even INTERESTED in the small, insignificant assignments that were available... I turned DOWN work offered to me!

Everything was rosy. It was so EASY and natural to get most of my income from one client. He gave us lots of work and paid the bills diligently. But what I forgot was that a client relationship is not a partnership or employment. Which I learned the hard way when they appointed a new Vice President of Marketing...

Well, it was good as long as it lasted. But once the new hand terminated our account it was panic time..

If I learned anything, it was this:

Never, EVER be satisfied with ADEQUATE income alone.

Always ALWAYS make sure your income comes from sufficiently MANY SOURCES so you won't be faced with income crisis of apocalyptic proportions threatening your very existence.

Analyse your income sources, minimize the income risk factor... and work the market to get new clients even when you feel you DON'T NEED THEM. One day, you'll be glad you did... regardless of whether an income risk materializes or not. It's a win-win situation, either way!

Here's the thing:

Clients are not forever.

They get into crisis of their own, they change their minds, bigger companies take over smaller ones, the decision makers change... things CHANGE.

Time in its essence IS change and thus, never get lulled into a false sense of security believing that "nothing changes" or that all change, by definition, would be positive in nature. The “let’s all keep our turfs” -thinking that’s so predominant within the accounting industry is also the epitaph that should be chiselled onto the headstones of most practices that stopped to be.

The best way to look at your clientele is as if it were a RESERVOIR of income potential... but one that LEAKS ALL THE TIME. Now, this has NOTHING to do with client satisfaction. Things just CHANGE constantly.

It may not SEEM like a "constant seepage" because the shift is so gradual – it takes quite some time for any major decision to develop until the results of it become known and take their inevitable effect. It may APPEAR like it came from out of the blue... but it did develop ("leak") for months or perhaps years.

Regardless of HOW well you service your clients, aside from how your income risks are managed, the reservoir leaks all the time. To correct that leak, you need to REPLENISH that reservoir to keep it level – to get more income sources... more clients. Employing an inexpensive system to obtain clients on continuous basis will also automatically minimize your income risk factor.

The better your profit from these (future) clients, the better your ability or reserve to absorb unexpected losses.

The key to creating more viability for your client (and your own firm) and minimizing the income risk factor is of course not in getting rid of big clients but in getting MORE clients. If you have one or more BIG clients you can set out to find an equal (or exceeding) income in dollars from NEW, SMALLER CLIENTS and thus balance the risk factor.

As such, not a bad idea for an added-value service for your clients, is it?

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Article Tags: definite recommendation, disappearance, economic downturn, explosive reactions, gunpowder, income risk, income source, income sources, investments opportunities, keg, mental stress, necessities, psychic powers, risk factor, risk management, running a business, second element, subject matters, vectors, viewpoint



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