While accounting advisory services have been a need for a long time, the onset of coronavirus-concerned issues, such as the Paycheck Protection Program, Economic Injury Disaster Loans, and others have brought this opportunity to the forefront for CPA firms. We are joined by Randy Johnston, executive vice president of K2 Enterprises, to discuss what sorts of services constitute advisory as well as emerging advisory areas for 2020 and beyond.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

The area of small business advisory has long been a space of opportunity for CPA firms. However, the arrival and lingering presence of the coronavirus has made this field even more vital, with small businesses having to make decisions about applying for Paycheck Protection Program loans and other forms of assistance. It is an important time for CPAs to step in and help lead clients and potential clients in the right direction. To discuss how CPAs and CPA firms can build their advisory services during this time, we are talking to Randy Johnston, executive vice president of K2 Enterprises.

The opening line of a piece you wrote for us on this topic for our blog, CPA Now, says “the need for advisory services among your clients and potential clients has increased notably during the COVID-19 pandemic.” Can you explain a little about why this is?

[Johnston] This is pretty straightforward because we've had the traditional saying about small businesses, maybe all businesses: “Cash is king.” So many of the businesses really didn't have enough cash reserves to go into this. The economy was running fairly strong. Then, all of a sudden, the brakes went on unexpectedly and that really did lead to a lot of the PPP and SBA loans that many public practitioners had to work on, because, let's face it, they were doing tax compliance, and, all of a sudden, March and April turned into a bunch of advisory work trying to rescue clients.

Frankly, a lot of the CPA firms maybe didn't even know how to charge for those advisory services. They may not even be able to collect on them in the future, but they knew it was important to do for the clients, so they just turned around and did them. What I'd really like firms to be thinking about is, how do you do proactive advisory services as opposed to reactive, which is what happened in the case of the PPP and SBA applications.

What kinds of services would you say fall into the category of advisory services? What are we looking at there?

[Johnston] Well, now, this one I'd like for the listeners here to just picture it working maybe in three levels, core services that you offer, optional services that you may offer, and I think it's wise to think that you can't be an expert in all areas. You just cannot do that. Maybe you're a concierge to introduce services in other areas. There's some very simple services that you might start with. In fact, I think it's also going to be fair to think of these as simple services and complex services. The simple services might be like cash flow forecasting, and many of your businesses need that cash flow forecasting. We could call that budgeting. That's one example of an advisory service. I can go off and name maybe a dozen or more advisory services that I'd consider, but I want to start with cash flow.

Another way to think about this is advisory services look forward, whereas compliance services look backward. An old analogy around this is advisory's looking out the windshield and financial accounting is looking in the rear-view mirror. Admittedly, as CPA professionals, we're doing a lot of financial statements and we're doing tax prep and so forth, but most of that is reactive as opposed to proactive. This looking forward is a real key element, and it is difficult to do, by the way. A lot of professionals don't have the formal training in these advisory services. Sometimes, CPA professionals learn them by having been in the industry for a while.

If you've always been in public practice, you may not have had the right situation to learn these things. It is quite different, frankly, even on compliance, and I'll pick something as simple as financial reporting or dashboards and KPIs, which are backward-looking. Many CPA professionals struggle with getting those things done, right, because they're not used to managing businesses with proactive dashboards, which could be an implementation of advisory service.

I found this to be interesting in the blog, when I read about it, because there's a subtle difference here between these two. Can you explain to us the difference between CAS – client accounting services – and CAAS – client accounting and advisory services? What's the subtle difference there?

[Johnston] I've been fortunate to be around the profession a long time and helped define the three-letter term of CAS, client accounting services. We did that originally in the 90s. I know that sounds hard to believe, but that's when that was all being done because we were developing these CAS products, like QuickBooks Online and later Xero. Gentek and NetSuite for mid-markets were developed at that time. I was involved with all of those products in that window, and also came up with the idea of hosting QuickBooks Desktop in that window. Then you've got Accounting Power and so on. You get the idea. That was probably 20 to 25 years ago. We thought client accounting services, as opposed to write-up services, sounded like a pretty good way to do it.

When I think about CAS – client accounting services – I usually put them in three levels, bookkeeping services, controllership – a little more sophisticated – and then CFO-type of services, which are much more close to advisory services and far more complex to deliver, and frankly not repeatable. In retrospect, I wish I had to do over on this one, where we'd have called it CAAS, with two As – client accounting and advisory services.

For anybody that's really doing advisory services and, even to some degree, those who are doing CAAS services, accounting services, you have to watch independence. I'm very fussy about professionals maintaining independence all the way here, but this whole thinking is that you come up with services that the clients need, and that could be mergers and acquisitions, it could be business structure changes, it could be process automation, it could be capital allocation, just to name a few more. But what you really are thinking about, just like you are doing CAAS, where you have multiple levels of services and advisory services,  is I need you to think about what you do as your core, what you do as option, and what you do as concierge, that really helps with that.

But net/net, I wish the industry would call this CAAS so everybody would build not only a client accounting service, but an advisory service. I believe that the clients really value advisory services, because one of the advisory services could be maximizing profits. See, I think a lot of our clients appreciate our tax work because we minimize tax expense. It's another way of maximizing profits. But we can actually create profits with advisory services, with our cash flow forecasting, with our profit planning, and, frankly, our strategic and tactical plans.

Speaking of advisory services that clients are going to value, what sorts of advisory services would you say are more emerging for 2020, and moving into 2021, and beyond really? What are the services that are really rising up?

[Johnston] This is a time of great uncertainty as I would see it. I believe that the traditional things of forecasting will become more important than ever. I believe that pricing will become more important than ever, and planning. I might pick those three. I almost want to use three Ps on that: profit, planning, and pricing. Those crossed over on two of them, but you get the idea, because I think we're going to go back to more fundamentals. It is so easy to staff heavily when you've got plenty of resources, but when things are a little tighter, staffing tighter becomes a consideration. Cash management clearly comes into play.

I think, also, fringe benefits will become in play here in 2020/2021. We know a lot of people lost their healthcare during the COVID-19 pandemic, and, unfortunately, the way that we deal with healthcare issues will come up. Another one that's come up frequently is real estate leases and construction, because many people learned in the temporary stay-at-home and maybe the new normal that, in fact, they didn't need as much office space. Planning to vacate on a lease could be part of the advisory planning going forward. This whole way that we deal with rental properties, if you have clients that are in that, I think that'll be a real big one in this window. If I had to name one of the three biggest impacts, it's going to be the way we use our buildings here across the U.S., and frankly, around the world.