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?

An economist, such as myself, might be regarded as a radical revolutionary when it comes to financial management. We’re pretty staid, And we apply fairly basic concepts to sort out a range of problems, providing solutions that tend to defy gravity as far as accountants are concerned.

When ROI rationality is of concern, that is trying to get the best return on your investment money, an economist takes a completely different approach to that of an accountant

Private Equity Business System

Accountants and business owners are generally familiar with the concept of leverage, yet fail to apply it in terms of its real power. As a business owner you did what most business owners actually do following accountants advice to let your cash sit there in the bank account to meet your expenses. lf you do leave your cash there for a period as a reserve it’s an asset.

borrow $100,000 that you need to pay your expenses. The interest expense is the cost of money, a deductible expense. So, a before tax interest rate of 10% comes down after tax.

Now we take the money out of your bank account. And we invest it. It could go into the real estate market where using leverage you get quite a decent return, you could put it into equities, the share market. Or it could go into your business. A $100,000 sitting in the bank dormant just sterile, not doing anything, can be put to productive use and you can make a 30% return before tax. You have a deduction for the 10% interest you might pay. You end up with a 20% before tax profit.The actual after tax profit is still quite substantial.

If reinvested in the next year, your capital can build, compounding exponentially year after year in to a substantial sum, ultimately producing massive business growth.

To be more effective in your decision making Embrace economic principles, apply economics to the real world.

Leave your accountant sitting there in the traffic, not moving.