Very few business owners, and probably even fewer accountants, recognize that a business mindset entrenched in accounting formalities retards business growth so you miss out on an enormous amount of money with less profits and your business never reaches its full market value potential. Business owners should appreciate the difference between accounting and economics. Economics is concerned with decision making analysis to come up with the appropriate solutions needed for maximum efficiency in allocation of resources and to achieving specific objectives of business owners and investors.
Economic analysis is a dramatic art, dealing with the dynamics of a changing world, relating to industries, markets, the economy and external events such as the coronavirus impact.
In contrast Accountants providing advice to business owners rarely direct business operations. While there are some analyses beyond basic record keeping they give only pictures at discrete points in time for a few scenarios. Advice put forward as to how things may be improved by ordering a few items is hardly a game changer.
For example consider a business that has one payment to make, say it’s $100,000 and the payment that it makes could be for anything. Say that the business follows the practical wisdom of the accountant. Traditionally, a balanced budget approach and the shining star, guiding principle that accountants promote. retiring debt. Even aggressive firms involved in private equity acquisitions follow that. They have a slew of accountants, who look at retiring debt normally in about five years from acquisition with logic that defies gravity, paying back debt by taking cash out of an enterprise reducing it’s capital. You only save the interest expense. It doesn’t matter too much what the interest expense might be but say it’s somewhere between six to 10%. If you take capital out of an enterprise to reduce that cost. You’re depriving a business of vital lifeblood, which should be put to work and generate a much higher return than the six to 10% interest. In fact if you’re looking at a profitable business, which would be sold probably at three times earnings, it would be generating an ROI in excess of 30%. Now, does the wisdom the accountants put forward make sense, is it rational, to actually take working capital out of the business to save ten percent when the business could be making 30% with that money?