Could Traditional Accounting Thinking Be Killing Your Business?
After more than 40 years Reilly can still hear the screech of the chalk on the blackboard. Vinny Leahy, Roscreas resident Commerce teacher, was explaining the first GAPP (Generally Accepted Accounting Principle).
Sales – Expenses = Profit.
Reilly would continue to hear that formula throttled out throughout his B. Comm degree in UCG and then, in almost every other business he worked in thereafter.
Logically, it made perfect sense. Sell like the clappers; spend as little as possible, and pocket the difference.
Reilly figured on bringing the formula all the way to the bank.
He was good at selling and in his first year in business he delivered eight national training programmes for the newly formed County Enterprise Boards and he resolved to pay himself little more than basic expenses until the business got airborne and profitable.
He can still remember the day he visited the accountant to determine if he’d made a profit or not. He’d felt confident about the outcome and insisted on bringing Wifey along with him to celebrate the result.
There was much tapping on computers and some frantic whirring of printers before the accountant administered a series of swirls and twirls with his Montblanc Meisterstück before declaring.
‘Well done. You made a profit of €17000. Not to be sniffed at in your first year in business,’ proclaimed the accountant circling the figure on the page.
Reilly was just beginning to feel the first surge of pride before it was swiftly stifled by Wifey.
‘A profit of €17000,’ she hissed frostily. ‘Where’s the money in the bank then?
There was the mother of silence before the accountant explained testily.
‘You must understand that this is an accounting profit which is anything but synonymous with money in the bank.’
Wifey wasn’t for holding back.
‘So what you’re telling me is that we made a profit but there’s nada in the bank.’
‘Precisely,’ said the accountant, pleased that his efforts at elucidation were being understood.
‘I’d prefer a visit to a gynaecologist any day of the week than a visit to an accountant,’ said Wifey as she exited an accountant’s office for her final time.
As there was little said in the car on their homeward journey Reilly was afforded ample time to conduct some deep thinking. Here’s what he concluded.
- Accountants view profit differently than business people. Accountants regard profit as a figure to be calculated to determine taxable income for Revenue. Business people see profit as money in the bank
- Reillys’ primary purpose as a business leader was to ensure that from now on his business would run at a profit.
- That very same day, driven by the inspirational dissatisfaction of his accountant experience, he resolved to set up a simple system in his bank. He set up a central holding account into which all revenue would be channeled. From that, he set up four separate accounts into which he agreed that a percentage of all revenue would be immediately diverted and the profit and tax accounts were non-withdrawable for the year.
- Operating Expenses.
- Three things happened almost instantly.
- Because there was less money available Reilly became infinitely thriftier. He began to put a much higher value on money, time, and his own worth. He began to enjoy the challenge and game of doing more with less. He became a minimalist.
- He became much more creative in both revenue generation and cost reduction.
- He discovered that profit wasn’t a one-off event decided by an accountant once a year but a daily habit.
Many years later Reilly was invited to give a talk to the MBA class at UCG.
- He titled it ‘The Old and the New Accounting Formulae For Business Success.’
- The traditional formula was Vinny Leahy’s – ‘Sales – Expenses = Profit.’
- The new formula is ‘Sales – Profit = Expenses.’
- Opinion on Reillys’ speech was deeply divided. The accountants in the group were vehemently opposed to it claiming it was puerile, immature, and sensationalist. The entrepreneurs and innovators in the room welcomed it and embraced it.
‘If there is one thing that will forever change your relationship with money, it is the understanding of ‘Parkinson’s Law.’ You need to intentionally make less money available to operate your business. When there is less you will automatically run your business more frugally and more innovatively.’
Mike Michalowicz, Profit First: A Simple System To Transform Any Business From A Cash-Eating Monster To A Money-Making Machine
‘Profit is not an event. It’s a habit.’
- Which accounting formula do you operate your business from?
- Do you automatically divert funds into a profit account; an income account; a tax account; and an operating expenses account?
Listen to Reilly explain in more detail the mechanics of ‘The New Accounting Formula for Business Success’ at Smácht Mor on July 22nd next. Details of Smacht Mor on Eventbrite
The day-long session will deliver practical takeaways on six business gems:
- Strategy. Walk away with a completed one-page strategic plan for your business.
- Mindset. Learn the mindset it takes to prepare for, and complete, a 3000 row across the Atlantic. Then, apply that to your business.
- Accountability. Find an accountability buddy who will hold you accountable for executing your strategy. Accountability is the single most important driver of business execution.
- Communication. Does your website pass the grunt test? In other words, would a caveman understand what you do? How it will solve his pain? And how does he buy it? Learn how.
- Health. Energy management is the new time management. The top performers in every field have high energy levels. Learn one strategy that will boost your energy; reduce your weight; and make you look great.
- Time. Learn how to implement a 3-Day Weekend that frees you up to do more of the things you’d like to do.
Once again, to reserve your place, go to Eventbrite.
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