19th January, 2015
First of all, let me get a confession out of the way — I am an accountant. In fact, I am a Chartered Accountant. I know. We’re (supposedly) a boring bunch who wear bowler hats and carry brief cases everywhere. John Cleese has a lot to answer for!
I no longer do any day-to-day accounting work — instead, for the past 16 years, I have worked with accountants in public practice to help them improve their own firms and offer business advisory services that really help their clients. I routinely advise accountants, when they are asked by strangers, “What do you do?” to avoid the response, “I’m an accountant” for these very reasons.
In reality, however, I am proud of my profession, and there are some very good reasons why business owners should think like an accountant — not all the time, but certainly from time to time. Here are six of those reasons.
Many accountants trained as auditors, and I am one of them. In fact, my wife sometimes reprimands me for auditing her when I ask too many probing questions about her reasoning for something. (It is a salutary reminder not to take your work home.)
Now, ‘auditor’ sounds even worse than ‘accountant’, I am sure, but all auditors are trained to ask lots and lots of questions, never take anything at face value and really get to the root of the issue at hand. Why is this important? Well, if something doesn’t smell right, there is usually a reason for it. Analytical thinking and digging deeper can help prevent you from going down blind alleys.
Running the numbers and considering worst-case scenarios can prevent costly mistakes in your business. (Incidentally, I sing in our local singers group in a tenor line comprising an actuary, an airline pilot, an engineer and myself. I am confident you will not find a more analytical tenor line on the planet!)
When a senior person in a business comes up with a new idea, what typically happens around the Boardroom table is everyone gets excited about the upside. People see dollar signs, new opportunity and interesting new projects. Everyone wants to jump on the bandwagon. But who is weighing up the risk?
Risk, or potential downside, is too often overlooked in favour of the potential of the new idea. An accountant mindset would contribute more thought and analysis. What is the worst-case scenario? What are we potentially giving up to explore this new opportunity? What is the breakeven cost of doing this? If we reallocate resource over here, what happens over there? This sort of approach can encourage a well-rounded argument and prevent you from jumping on a new opportunity and potentially wasting a lot of time, energy and money on something that has more downside than upside.
A word of warning: do not go overboard on this. It is important to weigh up the risk, but you do not want to stifle innovation.
In 1494, the Franciscan friar and mathematician, Luca Pacioli, documented the double-entry accounting system. It is written that he warned Venetian traders not to sleep at night until the debits equalled the credits. What on Earth does this mean and what relevance does it have to your business? Well, no doubt you have heard the expression ‘revenue is vanity, profit is sanity, but cash is King.’ Driving growth for growth’s sake is fraught with danger, especially if you don’t understand double entry.
Many business owners ask their accountants why they made a profit on paper, but there is no cash in the bank. It is clear as day to the accountant, and they should make a point of educating their clients in the basics of double entry.
For example, you can sell me something for $100,000. It will show on your profit and loss accountant, but if I don’t pay you for six months and you’ve had to pay your suppliers and employees before that time, you could conceivably run out of money before you can celebrate the profit on the sale.
It’s one thing to notice that sales are down year on year, or below target. But it’s yet another thing to understand why.
A good accountant will get you very focused on the key drivers of revenue, cash flow and profitability in your business. If your sales are down, you need to be able to pinpoint the cause. Did you lose too many customers? Or not acquire enough new ones? Or perhaps you simply didn’t have the volume of transactions that you were forecasting. Or maybe volume was OK, but the average transaction value fell for some reason. No cash? What’s happening? Are your customers taking longer to pay you? Is your inventory management out of control? Or have the business owners pulled out more money than they should have done?
By getting very focused on your critical numbers, you can avoid these surprises and take remedial action before it’s too late.
I have my wife well trained. Before she buys anything of significance, she asks me ‘do I have budget to do that?’ I keep telling her she doesn’t need to ask me, but secretly I am proud of her thinking like an accountant.
It’s my view that most small businesses would benefit from a live, working, cash flow and budget, and that accountants should be recommending that service to their clients. (If your accountant is not, why not think like an accountant and ask them what might be involved?)
It’s important to understand the timing differences between sales revenue and cash inflows, expenses and cash outflows. If you need to buy a new machine, how are you going to finance it, and what’s the impact on your cash position?
Most businesses could eliminate five to 10 percent — sometimes more — in costs by focusing on this question: are we getting the very best return on investment for this cost or expense? View all of your business expenses as an investment. If they do not contribute in some way to revenue generation, protection or growth, why do you have them?
A good example is advertising. Most small businesses advertise in two or three places. But few understand the return on investment on each campaign. Because of this, they simply renew the advertising each year instead of questioning which of the three campaigns got the best result, then doing more of that one and cutting out one that loses money. You can apply this thought process to all of your expenses.
I hope you’ll take two or three of these ideas and apply them to your business. Give it a go — it’s not too scary thinking like an accountant!