We accountants like to joke that accounting is the second oldest profession…which might give you some idea why we’re accountants, rather than stand-up comics.
But ever since commerce became more complicated than agreeing how many chickens I’d need to swap at the market so I could take a goat home with me instead, accountants have been an important part of the economic system across cultures and continents.
From ancient Mesopotamia, through the lives of ancient Egyptians and Babylonians, there were people whose job it was to track what people spent and how much they owed to one another. Some of the oldest documents to survive from antiquity are tax records.
Accountants might not be quite the second oldest profession, but we’ve certainly been around for some time.
Any profession which has been around for some time, though, is in danger of becoming a little stuck in its ways. Which might not matter quite so much if the world hadn’t got a lot more complex in recent years.
So how do you know if your accountant isn’t just trundling along in a way that might have worked perfectly well 20 years ago, but doesn’t quite cut the mustard anymore as we travel deeper into the 21st century?
As the 2010s give way to the 2020s, I believe there are three areas where the “old rules” of the accounting profession need to change and modern accountants, especially Finance Directors and CFOs, need develop a different way of thinking in the face of a new economic reality.
Cost v. Bottom Line
Accountants are used to tracking costs and budgets. It’s often the first thing people think of when you say the world “accountant”. But that’s not enough any more. The key question now is how much of a positive impact an accountant, Finance Director or CFO makes to the bottom line.
Imagine you currently spend £100,000 a year on something. While you want to make sure you’re getting good value for your business’s expenditure, the maximum impact anyone can make on the bottom line with “cost-based thinking” is £100,000.
That is, if you stop the activity completely, you’ll save the entire budget of £100,000 a year. It can never be any more than that, no matter how much time and effort you put in because you can’t reduce any cost below zero, no matter what you do.
But what if your accountant concentrated their efforts making the biggest positive impact on the bottom line…what difference might that make?
For starters, a bottom line-focused accountant might recommend you don’t reduce your £100,000 budget at all, and perhaps even think about increasing it.
Let’s imagine the £100,000 was your business’s budget for customer loyalty initiatives. Everyone knows that it’s much cheaper to retain a customer you’ve already got than go out and find a new customer you haven’t dealt with before.
Slashing the customer loyalty budget (a cost-focused approach) could result in customers becoming less loyal to the business over time, which could in turn both reduce customers’ total lifetime value and increase the sales and marketing costs as the business would need to invest more money to attract new customers to replace the shortfall in sales from existing customers.
Admittedly, if you were only thinking about the short-term, you could probably slash the customer loyalty budget and for six months to a year you might just about get away with it. The loyalty built up in times gone my would probably see you through for a while.
But gradually, for reasons nobody could quite put their finger when it eventually happens, the numbers would start going the wrong way. Customer loyalty would decrease, previously loyal customers would scale back their purchasing and the business’s income would reduce.
By then, nobody would remember that the customer loyalty budget was slashed in half six months or a year earlier. Scapegoats would be found elsewhere when the business bumped up hard against its next crisis. But I guarantee you, the root cause of the next crisis will be the short-term move you made in response to the last crisis.
An accountant who focuses on the bottom line, instead of purely on cost makes a big difference. That’s where your Finance Director or CFO can have the maximum positive impact on the value to your business.
Tangibles v. Intangibles
Traditionally, we accountants have preferred things we can see, touch, feel and count, rather than the “fluffy stuff” like intangibles.
But the world has moved on.
Currently, the bulk of the market capitalisation of the S&P 500 is based , not on the value of tangible assets like factories, trucks and offices, but on their intangible assets. The precise number varies with the stock market fluctuations, but at the time of writing solidly over 80% of the stock market valuation of the S&P 500 companies is not derived from the tangible assets on their balance sheet.
For example, Coca-Cola’s market capitalisation is around $200bn today. But their latest balance sheet showed a little under $10bn in tangible fixed assets – the accounting term for their factories, machinery, trucks, and so on.
As you can see, the value of Coca-Cola is many times the value of its “hard” assets.
Which creates a dilemma for accountants.
Traditionally accountants would focus on things they can see, feel and touch. But if that’s all you do nowadays, you’re not spending any time looking after the assets which account for the majority of the company’s value. Surely that can’t be right.
I tell people that, if 80%-plus of the value of the S&P 500 is made up of the value of intangible assets, a good accountant should be spending at least as much time thinking about those things as they do about the more traditional definitions of the word “asset”.
Whether they’re quoted on a stock market or privately-held, for most businesses, their intellectual property (IP), customer loyalty, brand, marketing assets, track record of innovation and a host of other intangible factors will account for more of the business’s total value to a shareholder or potential purchaser than its traditional fixed assets.
If you want to make your business as valuable as possible, make sure your accountant spends at least as much time focusing on the intangible assets that account for 80%-plus of your business’s overall value as they spend on the tangible fixed assets which nowadays accounts for a tiny proportion of the business value, but which are admittedly a lot easier to count.
Yesterday v. Tomorrow
As a friend of mine puts it, how much time does your accountant spend looking in the rear-view mirror instead of keeping their eyes on the road?
Traditionally accountants focus on events that have already happened…last month’s management accounts, last year’s statutory accounts, the last VAT quarter, and so on.
Now, of course, there is a need to examine what happened last month, last quarter or last year and report on how well the business did compared to expectations. But you’re unlikely to create substantial value for many businesses from purely concentrating on yesterday.
It’s like being a CSI who comes along after the bullets have stopped flying and tries to work out who did what to who. Of course that’s important, but isn’t it better to work in such a way that nobody gets killed in the first place?
In a business sense, that means looking into the future and anticipating problems before they arise, making sure the business’s operating model is well-honed and understood by all, and that the business takes profitable opportunities to grow as they come along.
All those activities build value which is, after all, what anyone with an interest in the business wants.
So next time you’re wondering whether your accountant is adding value to your business, ask yourself how well they are performing against these three tests.
The commercial world has moved on rapidly in the last 20 years. It’s vital for the success of your business that your accountant has too.