The financial stuff accountants don't tell you

Article By

Peter Wilkinson

Director - Tipping Point Advisory

With a background in business, a father who owned his own accounting enterprise and a wife who has spent a great deal of her working life with a “Big 4” firm, I have had quite a bit to do with accountants. Naturally then and as a graduate from the engineering fraternity I’m going to try and give a balanced view on the accounting profession. In the interests of fairness I’ll also take a bit of the mickey out of my own mob at the same time.*

Accountants are pretty good at advising you on how to avoid risk. Their lives are by necessity all about measuring the past, as the rules by which the profession is governed say they must. You can trust a good accountant to give you an unbiased view on what has already happened in your business so that your performance can be compared with other businesses. Their key tools of trade are the Profit & Loss Account, Balance Sheet and Cash Flow Statement. You should also be able to trust your accountant (along with your lawyer) to structure your business appropriately and minimise risk exposure. He or she should also be well versed in giving the Tax Office such a bleak view of your business that they wouldn’t dream of issuing you a tax bill (or something like that). 

But what if you want your business to be “outstanding in the field?” with a value that will compensate you for all the hard work that you've put into building it? Of course you will need to go and find a problem in the market and solve it better than your competitors. You will also quite likely need to accept responsibility for some of the risks associated with your solution and manage them better than most. But what's really under the bonnet of the most valuable businesses?

In my experience, most entrepreneurs have a pretty good idea of the problem they want to solve. Not so many entrepreneurs I come across know how best to solve the problem and deliver the answer in a way that maximises the value of their business. Let me illustrate with a formula for business Value:

V=PxM

So the Value (or Valuation) of your business equals Profit multiplied by an earnings Multiple. Without going into the finer details, the magic is not in the Profit part (that’s what the accountants measure and report on). It’s the earnings Multiple that drives the value of your business. So where is this value found? (hint: It’s not on the Balance Sheet):

  • A business that needs great people to solve the problem and has a look and feel that attracts and retains great people, is worth more than the average business;
  • A business that does what is does in a really clever and efficient way is worth more than its competitors;
  • Businesses that are worth more than their peers solve their clients’ problems with more than one product or service or do their thing in more than one way and place;
  • If your customers can recall who you are just by your brand or your company can generate a heap more business with very little additional operating expense….well by now you can guess the rest!

The trick to building business value is actually in recognising the power of focusing on building business capabilities that drive the earnings Multiple!

So in this sense, making great money out of your business is actually about (a) building business capabilities that enable you to (b) solve a problem and (c) manage the risks arising better than your competitors, wouldn't you agree?

 

* Here’s a short story you might like:

 “A Boy and His Frog”

A boy was crossing a road one day when a frog called out to him and said, “If you kiss me, I’ll turn into a beautiful princess”. He bent over, picked up the frog and put it in his pocket.

The frog then cried out, “If you kiss me and turn me back into a princess, I’ll stay with you and do ANYTHING you want.” The boy took the frog out, smiled at it and put it back into his pocket.

The frog cried out, “What is the matter? I’ve told you I’m a beautiful princess, that I’ll stay with you for a week and do anything you want. Why won’t you kiss me?”

The boy said, “Look I’m an engineer. I don’t have time for a girlfriend, but a talking frog is cool.”

 

And just because I can’t help myself…….

Where do homeless accountants live? In a tax shelter.

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