Short-termism is a common issue in the business world. Large corporations may focus on short-term goals as a way to maximize immediate value for shareholders, while small businesses do the same as a survival strategy. Unfortunately, this type of thinking often comes at the sacrifice of poor long-term planning and value creation, and ultimately, the success of the business. As an accountant, you have the power and the responsibility to help safeguard your clients from the effects of short-termism. In doing so, you can earn loyalty and protect your reputation as a financial expert. As an added benefit, you can help your clients keep their doors open, which benefits your business.
Encourage Balanced Capital Planning
The way your clients use financial capital has a big impact on long-term success. A balanced approach is usually best. You want to encourage your clients to spend enough in the short term to meet immediate needs, while also leaving enough of a balance for future investment. A financial buffer can also help businesses handle unexpected challenges so they can make it through tough times without sacrificing progress toward their long-term goals. Imagine a manufacturing company that spends 90% of its capital on a sizable factory staff and high-end equipment in anticipation of large orders. If those orders never come in, your client is stuck with a tiny bank balance, useless equipment, and expensive staff. A better option is to buy used equipment and start with as few staff members as possible; this way, the company has the capital available to scale as needed.
Assist in Shareholder Communication
Corporations often feel pressure to pass on all of their profits to shareholders, usually as a way to prove the company is doing well. From an accounting standpoint, this type of short-termism can be dangerous. After all, if your client doesnt invest enough of its profits back into the company, this can lead to problems down the road. The company might not have the money to purchase necessary technology upgrades, pay salaries when demand drops, or expand to stay competitive. As an accountant, youre in a great position to help clients get over the fear of disappointing shareholders. To start, consider volunteering to help with education and communication; your clients may feel too intimidated by financial topics to do so on their own. You want to work with clients to define long-term business goals, and lay out the investment steps necessary for growth. Then, put this information into language thats easy for a layperson to understand. Your clients can use that language to educate shareholders at meetings or in newsletters. This type of transparent communication can reassure investors and reduce the shareholder pressure that leads to short-termism.
Develop Financial Metrics
For your busy CEOs and small business clients, financial tracking is often just one item on a long to-do list filled with more immediate needs. To help clients avoid focusing only on short-term issues, work with them to choose financial metrics that present a realistic picture. Most companies benefit from tracking:
- Monthly cash outflow
- Net profit
- Gross profit
- Selling, general, and administrative expenses to sales ratio
In addition, help clients to choose metrics that relate to their specific business goals. If a business wants to expand its customer base, you might track return on investment for marketing and advertising campaigns.
Compare Metrics to Long-Term Goals
Once you choose financial metrics, its time to make use of them. At the end of each quarter, run a report for each metric in addition to standard reports: profit/loss, balance sheet, cash flow, and retained earnings. Then, help your clients understand how the reports show progress toward their business goals, and recommend adjustments as needed. This strategy makes it easier to focus on the future without losing sight of the present. Although short-termism is a persistent issue in the business world, you have the power to help clients avoid it. By taking a proactive approach, you can guide them toward more sustainable practices and make your accounting business an invaluable asset.