“Don’t let accountants run your business!” My dear dad gave me that advice when I started my own company. This was especially meaningful because not only was he a CPA; he also had a career in financial management in the Fortune 500. Many times, he relayed stories about how decisions that were based solely on an accounting perspective would have been terrible for the business.
There’s a simple reason for this, though it’s not readily apparent to business owners when they’re speaking to their own accountants: Accounting is a compliance process – not a management process. The methods and practices of accounting have little relation to the operation of a business.
The accounting methods common across all industries are based on a series of esoteric rules, formulae, and terminology meant to record an entity’s assets and income for the purpose of paying taxes. In fact, the core theory (if we can call it that) from which all accounting is based was developed by a Venetian monk more than 520 years ago. His name was Luca Pacioli, and he invented the double entry bookkeeping method built into every general ledger software program sold today.
Space flight, computers, open-heart surgery, Starbucks … all invented in the last hundred years. How crazy is it that no one has come up with a better way to record cashflow in over half a millennium?
The ancient practice of accountancy, and the financial analysis methods built on top of it (like so many layers of dry paint) are the reason business owners endure tedious conversations with their CPA about how that equipment purchase last June was improperly recorded, or why they owe more in taxes & penalties this year. And to emphasize my dad’s point, it’s why accountants can’t provide good advice on important business decisions.
What should you do, then, if you want to use the financial information coming out of your business to guide it to more profitable growth?
What can you rely on when the numbers on your P&L and balance sheet can’t tell you whether you should change the product mix, pursue a different market, increase marketing spend, or help with any number of real-world decisions you face?
I’ll share what I’ve done to follow my dad’s good advice to keep accounting from getting in the way of running my business. It involved making one executive decision and practicing a simple mental trick.
The decision was to outsource all the traditional accounting in my businesses. I eliminated the complexity of managing an internal accounting function by delegating my tax and bank reporting to outside personnel who know the secret methods of the Ancient Order of Bookkeepers. By doing this, I keep the noise level from these activities down to a minimum so I can focus on what’s important to the growth & profitability of my core business.
If you’re thinking at this point that outsourcing gives up too much control, keep in mind that accuracy and timeliness are the only requirements of accounting. There’s nothing to “control” except picking the right vendor.
The mental trick is to only see the numbers that reflect core business activity when you look at your financial reports. In other words, ignore the account names and line items that are written for compliance purposes and home in on the few key numbers that matter: top line revenues, gross profit, and operating profit. I also record some operating metrics in my own spreadsheets to track trends.
The owners I know (including accountants who run their own firms) are in business for a reason; and it’s not to keep the books or read the latest tax regulations. So, before any accountant in your family takes offense at my reference to “normal people” in the title, remind them that their chosen profession is secure for at least another 500 years.