[IMGCAP(1)]When coaching accounting firms on crafting an industry niche-driven growth strategy, there are three critical questions that we work together to answer. The first step is to assess how well aligned your firm is with the industry.

What is going on in the industry? What trends and changes (regulatory, technological, etc.) have and are defining the environment?

When working with firms that have access to industry data on how to answer the first of these questions, I often recommend a seven-step approach to gaining a better understanding of an industry:

1. Begin by analyzing an averaged Common Size Statement for the industry. A Common Size Statement is used to compare financial statements by displaying accounts as a percentage of a common base figure. This format (vertical analysis) makes it easier to do an analysis between companies or time periods and provides an excellent way to gain a better understanding of the financial and operational structure of businesses within an industry.

Common Size Income Statement: Accounts are shown as a percentage of Sales. Use to analyze the average (1) distribution of various revenue / income sources and (2) breakdown of expenses / cost centers for businesses in the industry.

Common Size Balance Sheet: Accounts are shown as a percentage of Total Assets. Use this to analyze the industry average (1) composition of assets and (2) breakdown of debts / liabilities.

2. Recent Trends: Analyzing changes in the industry between the prior year(s) and the current period will provide insights around the environment in which the client or prospective client is operating and the types of challenges, opportunities and decisions they are likely encountering.

3. Growth Metrics: At the core of any business’s financial health is their ability to drive revenues (sales) and control costs to generate a profit. Analyze how successful other businesses of similar size and scope within the industry have been in their efforts to drive profitability.

4. Margins: Has the industry improved its ability to control costs and generate a profit? If so, use the Common Size Income Statement to gain an understanding as to where and how costs have been controlled.

5. Employee-Centric Metrics

6. Operating Cycle Related Ratios

7. Industry-Specific Key Performance Indicators: Industry-specific (financial and non-financial) KPIs define how similar businesses measure success and should yield meaningful talking points.

In our next column, we will tie together these initial insights to the second question that must be answered: How do these conditions create opportunities and/or obstacles for a business operating in the industry?

Lauren Prosser is director of Sageworks' ProfitCents Professional Services, a team of specialized consultants providing partner coaching, small group coaching, and firm strategy construction services to accounting professionals throughout North America. Sageworks’ data and applications are used by thousands of banks and accounting firms across North America.

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