Why Accounting is an Investment and Not a Cost | Rea CPA

Why Accounting is an Investment and Not a Cost

Accounting An Investment | Rea CPA

In my 30+ years in the industry, too often I’ve witnessed owners that treat the accounting and finance function of their business only as an expense or cost center. It’s somewhat understandable (after all, there is no revenue stream), but shortsighted. Let’s lay out some examples that help bust this myth:

  • Risk Management and Analysis – ‘It will only take one risk to crumble a business’ are the words of many a contractor or real estate developer. A single large job or project risk, if not properly managed, can take down any business. Accountants are risk managers that understand the special language of the business. Good accountants and finance professionals have a unique blend of experience in the industry to be able to identify risks and potential weaknesses. Think beyond producing financial reports – if your internal and external accountants understand your business, they can point out ways to properly interpret financial information and be proactive in helping you manage the business and make decisions.
  • Ownership Transition – Whether it’s a sale to the current management team, next-gen family ownership, ESOP, or third-party, a lack of strong financial reporting will greatly hinder a company’s value. Why? In any ownership transition, examining historical statements, detailed trial balances, current operating results, budgets, and forecasted financial information is vital to determining a business’s true value. Typically, the scope of diligence also includes working capital and capital expenditure requirements, an analysis of the historical quality of earnings (EBITDA), quality of billing & collections, and payables/debt. The objective here is to identify any unreported liabilities, understand the company’s current financial position, and determine if earnings are sustainable. These activities help ensure a realistic valuation of the business and justification of the purchase price to any outside party examination. The absence of good financial information reduces the value because of the increased risk to the purchaser and financing provider.
  • Tax Profile – Too often, businesses are penny-wise and pound-foolish in seeking a low-cost provider. Tax is more than just compliance. A good tax advisor can delve into your overall tax profile by analyzing returns and the company’s tax structure. This typically involves a focus on both income and non-income tax areas – sales & use tax, employment/payroll taxes, and other potential state & local tax and nexus issues. Tax examination is a highly emphasized area of financial due diligence, as the new owners will likely be liable for any tax issues they inherit. Overstated net operating losses, underreported tax liabilities, non-filing exposures, failure to charge sales tax, or pay use tax are the most common risks.
  • Fraud Prevention and Cyber Security Awareness – Statistics have shown that companies lose more by way of fraudulent activities of stakeholders than they lose through the economic downturn and the action of competitors put together. Accountants work in tandem with other managers to ensure that internal controls are properly executed. Further, any business that lacks a cybersecurity-savvy accounting and finance staff does so at its own peril. Understanding and working in tandem with a group like Rea’s Information Services practice that includes managed security information technology and governance, risk, and compliance services raises awareness and creates firewalls.

As you can see, by providing accurate, detailed information that allows for greater value determination, or reducing risk in your business, strong internal and external accounting and finance professionals improve the value of your business. If you’d like to discuss specific situations in more detail (and even hear a few of my favorite horror stories), please reach out to me at doug.houser@reacpa.com or 614.314.5937.

by Doug Houser, CPA, MBA, CEPA (Dublin Office)