When a client’s business has poor cash flow, it might look on the surface to be a problem best solved with spreadsheets. But that may only be a quick fix for a much deeper recurring issue — a poverty mindset.
Emotions and mindset go hand-in-hand with financial literacy in making business decisions. So you can’t ignore the crucial human elements. As an accountant, you need to understand your client’s money beliefs to help them succeed financially.
Here’s what we cover in this article:
What is a poverty mindset vs a wealth mindset?
Let’s start with a poverty mindset.
There are some people who grew up in an environment where resources were limited and they were constantly reminded that “money doesn’t grow on trees” and “money is evil”, along with other criticisms of wealth. And in time, they internalised those beliefs.
Now in adulthood, those negative beliefs are triggered subconsciously when money is involved (regardless of how much is in their bank account). The result often leads to poor financial decision-making (both personally and, for those who are business owners, in their businesses). It’s a mindset driven by fear.
This fearful thinking can manifest itself in two ways:
- Always spending what they have because they may not get more in the future.
- Hoarding what they have because they may not get more in the future.
The alternative, a wealth mindset, is held by people who believe there is plenty of everything for everyone to go around. Therefore, they don’t see themselves in competition with others, and are happy to see others succeed.
They are happy to spend money to increase their business knowledge as well as invest time into their own personal enrichment. They have more of an appetite for taking calculated risks that will increase their wealth.
How can you identify a client with a poverty mindset?
When you’re discussing finances with your client, look out for visual signs of stress and worry. This will usually involve heightened emotional reactions such as sensitivity, aggression or defensiveness.
They are also likely to make negative statements about money and show a lack of confidence around their money-making abilities.
Examples of negative statements include:
- “I’m bad with numbers”
- “I’m paying too much”
- “I can’t afford”
- “I’ll take what I can get”
- “It’s not my fault”
- “It’s not going to get better”
- “I’m doing the best with what I have”
- “I have bad luck”
Their questions will focus on how to reduce costs, often in unhealthy ways. For example, by placing emphasis on sunk costs or by obsessing over minimising tax.
Watch out for clients who are accepting of business failures without looking to improve and grow. Someone with a pessimistic attitude to money expects failure.
When you’re reviewing accounts, pay attention to recurring cash flow shortages, low profit margins, and a lack of investment in long-term assets and development costs such as training.
You may come across unnecessary spending in order to take advantage of deals, as the person is likely to obsess over saving small amounts here and there.
How does a poverty mindset affect you client’s decision-making?
When it comes to making money, a client with a poverty mindset has much different priorities to one with a wealth mindset.
A fearful client focuses on the short term and values investments that reward them quickly. They are pessimistic about ideas that focus on generating profits over longer periods.
Whereas a client with a wealth mindset chooses opportunities that will build momentum and continue to pay off long after the initial investment.
A client focusing on long-term gains will be able to persist through temporary downturns. On the other hand, a fearful client will tend to quit in reaction to the pain of a sudden loss, instead of making a strategic decision.
The client with a poverty mindset is less likely to lean on others. They believe they can do it all themselves if they just work hard enough.
This means refusing to outsource work in order to focus on their core strengths in the business. They are also less likely to form the business relationships created by investing in networking and attending business events, which results in lack of support from fellow industry professionals.
This mindset is in danger of causing burn out if the person continues to plough all their money back into their business instead of taking a fair salary and regular holidays.
How can you help?
Like any habit, your client’s mindset can successfully change over time if they have the right structures in place and are surrounded with positive influences. If you can encourage your client to extend their network and invite positive business role models into their life it will be hugely beneficial.
It’s important to lead positive discussions about profit and tax. Listen carefully for any negative statements and flip these around.
For example, remind them that every healthy, successful business pays tax.
With patience, you can expose their negative concepts for what they really are — stories, not the truth. You may sound like a broken record, but your client has been repeating these beliefs to themselves for a lifetime!
One way to help your client get out of their heads and focused on their business health is with data.
Using external benchmarking data, you can show them the industry norms and how they are performing relative to similar players in their industry.
This is a great starting point for discussing possible efficiencies as well as building confidence in the areas they are performing well.
Think about whether the pricing of their products or services need to be revisited. Look at ways to improve their pricing structure. For example, could they narrow their focus to charge a more premium price?
Small business owners rarely charge what they’re worth, so consider how you can teach them to demonstrate the value of their unique selling proposition.
Your client won’t be able to serve their business if they are overworked and stretched to their limits. Put systems in place to pay owners a regular salary.
You can also discuss the possibility of hiring more employees to run the day-to-day operations to free up their time for more strategic opportunities.
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