Local area statistics: a practice development tool.

CPA firms that simply compare client data tracked in annual audits (debt/equity ratios, for example) with prior-year or budgeted amounts are missing a marketting opportunity. Gathering similar information from local businesses in the same industry allows firms to make more meaningful comparisons and establish relationships with potential clients. Michael D. Chase, CPA, president, Professional Development Training Corp., Cuthbert, Georgia, tells how to get started.

The knowledge we acquire about audit clients' businesses and their industries helps us design more effective and efficient analytical procedures. However, such procedures are useless unless we can compare the results with other pertinent data. Typically, we compare test results with prior-year balances, budgeted amounts or industry averages. A far more effective and reliable approach is to compare a client's business "vital signs" (for example, current assets, current liabilities, net sales, direct job costs, number of employees and so on) with benchmarks--industry averages for companies in the same geographic area.

A STRONG MANAGEMENT TOOL

Although analytical procedures are good audit tools, they may be even stronger management tools. As an extension of the audit, we show our clients their vital signs and teach them how to track and use this information to make better management decisions. This way, our clients readily understand the value of accurate, timely financial records during the year, which in turn improves yearend audits. Once clients recognize the value and use of analytical procedures, they see how much more powerful such procedures would be if they could compare their statistics with those of other local companies.

For these reasons, local area statistics can greatly enhance the use of analytical procedures. But there is another compelling reason to gather these numbers--marketing. The simple effort of gathering the information from other businesses, which should include nonclients (and potential clients), helps practitioners become experts in a particular industry. Armed with such information, firms do a better job on audits, help clients manage their businesses better and create a strong marketing tool. Let's look at a simple method for developing local area statistics.

HOW TO DO IT

The first step is to pick an industry with which firm members are familiar and identify pertinent vital signs--6 to 12 key ratios or relationships that clearly define that industry's performance. Start with four or five clients in that industry, go through the files and compute the targeted vital signs.

The next step is to survey nonclients. A cover letter should explain the project and the vital signs chosen for their industry. Each of the recipients should be given the ratios and assured the firm is not interested in their proprietary information, which they may be reluctant to divulge, but wants instead to include their numbers to ensure industry data are representative. (Exhibit 1, at left, shows a sample survey for the heating and cooling industry.)

EXHIBIT 1

Southwest Georgia heating and cooling industry survey

Company:                           Contact:
1. Current assets
2. Current liabilities
3. Cash on hand and in the bank
and accounts receivables
4. Net fixed assets
5. Total assets
6. Total liabilities
7. Net sales
8. Direct job costs
9. Equipment and materials
purchased for jobs
10. Total expenses
11. Employees
     Installation mechanics
     Installation apprentices
     Service mechanics
     Service apprentices
     "Overhead" employees
     (bookkeepers, receptionists, etc.)
     Managers
     Other employees not included above

The cover letter should tell recipients they will receive the results on completion of the project. Simply because the firm has solicited this information, nonclients are likely to perceive the firm as an expert in their industry.

When the firm receives enough results to create a sample of an industry in the target area, members can begin to put together the local area statistics and share them with respondents. With a spreadsheet program, it is very easy to summarize the results. If there are enough responses, the firm may segregate the results by company size. It's also possible to provide each respondent with its own vital signs and a comparison with local (and, if appropriate, national) results (see exhibit 2, at left). It is a nice touch to add a brief "profit letter" that includes two or three practical suggestions for improvement or at least highlights a weakness.

EXHIBIT 2

Southwest Georgia heating and cooling industry statistics

July 19XX

Category: revenue less than $1,000,000

                             Bubba's     Southwest
                           Heating and    Georgia     National
Vital signs                Cooling, Inc.  averages   averages
Current ratio                   1.2       1.4         1.5
Acid test ratio                  .8       1.1         1.1
Debt/equity ratio               1.1       1.5         1.9
Receivables age              55 days      42 days     57 days
Inventory age                73 days      50 days     48 days
Working capital/revenues        8%        8.5%        9.7%

These steps offer firms greater industry knowledge, which will help with future audit clients in that industry. The data also offer important industry information that will help in consulting with clients on how to run their businesses better. Surveying nonclients and following up with the results, along with a brief profit letter, reinforce the perception of the firm as an industry expert.

The final step of such a project should be to summarize the results in an article for publication in a local business paper or journal. Once it is published, firm members can volunteer to make presentations on the results to industry trade association meetings.

Staffing such a project is not expensive. Once an industry is identified and the vital signs determined, the balance of the work can be handled by staff who bill at lower rates, interns or even clerical staff.

LOCAL EXPERTS

National firms have been developing industry statistics successfully for years. As politicians have learned over time, all politics are really local and CPA firms do well to establish themselves as the local experts on targeted industries.

EXECUTIVE SUMMARY

* BY DEVELOPING LOCAL area statistics--industry benchmarks in a geographic region-- CPA firms will be able to compare clients' business "vital signs" with those of local companies in the same industry.

* AS AN EXTENSION of the audit, CPAs should show clients their "vital signs" and teach them how to track and use them in making better management decisions.

* BY CHOOSING 6 to 12 key ratios for an industry, surveying clients and nonclients and reporting the results, firms provide a valuable service and position themselves as industry experts.