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A New Strategy for Doing Accounting Work

for Small and Medium Sized Businesses

 

by Adrian W. Hollander, CPA, CISA, CIA, CBA, President of Complus Inc.,

President of the Chicago South Chapter of the Illinois CPA Society

 

(derived from an article, "Economics of Accounting," authored by Mr. Hollander

and published in the Illinois CPA Society Newsjournal in June 1990)

 

 

THE PROBLEM

Many executives and business owners see accounting as boring drudgery, coolie labor, a cost to be avoided, a necessary evil. Accountants are stereotyped as "bean-counters," and some of us deserve the comparison. According to many, accounting is only necessary to prepare tax returns, to comply with government regulations, and to satisfy demands of creditors and other investors. When the accountant brings bad news, they shoot the messenger.

The foregoing attitudes, though, cause managers to miss many opportunities to use information for better decision making. How do we decide among financing alternatives, choose among competing suppliers, reward workers for performance, or bid competitively for work without a substantial accounting database?

 

VALUE AND COST

Financial information for regular use within a business has a half-life of about a week -- its value declines by about 50% for each week that passes after its effective date. After about a month goes by before the appearance of financial statements, the cynic's negative attitudes about accounting are easily justifiable.

Producing accurate, timely, useful financial information is not a free service. A business will pay for good accounting, whether it gets it, or not. Consider this rule-of-thumb calculation to substantiate what you should pay for accounting:

10% to 25% of "indirect" costs (for simplicity, you might use "gross profit")

Those costs which are directly related to sales or production, whether or not conventionally classified as "cost of sales," should be excluded from the base for the computation. Very profitable companies should not spend more on accounting just because they have the money. Neither should a company that is not very profitable simply take a "meat-axe" to accounting, pretending that it is unnecessary. Rather than just trying to reduce costs, we should get that for which we are paying.

 

RESOURCES -- EQUIPMENT and PEOPLE

To do accounting work today requires automation. Executives, if you don't see the worth of investing in a computer for your accountant, get another one -- accountant, that is. Don't tolerate long break-in or conversion periods either. Technology changes too fast. Today's purchase of desk-top office computer equipment should pay for itself in about six months. Automation should triple the productivity of an accountant who previously worked with only a pencil, paper, an adding machine, and a typewriter.

Large businesses do have an advantage here. Their substantial capital funds can pay for experiments and support slow learning of a few workers. Those freed from one place can be more easily given other duties. In large accounting departments the almost certain concentration of duties will have little impact on the traditional "segregation of duties" principle of internal control. "Normal" attrition will help to avoid hasty or arbitrary reductions of head-count. But, "small businesses" account for almost 90% of the business entities and about 50% of the employment in the U.S. now.

If we should expect computers to triple productivity, what is the manager of a one or two-accountant office to do? Does accounting become a part-time job? Maybe yes, or maybe no. With automation, many data gathering procedures and accounting analyses may now be practical, though previously foregone because they were too difficult or time consuming. On the other hand, just because we can do more doesn't mean we should. Be wary of Parkinson's Law -- work expanding to use the resources available.

Good accounting requires skillful personnel, and with computers, maybe even more so than before. Contrary to popular belief, making available an accounting package on a personal computer does not usually, by itself, get good accounting. Using a computer, an unskilled or careless operator can spread the results of mistakes and bad data many times faster than he/she could with a pencil. We must be on guard for the new "GIGO" principle -- garbage in, GOSPEL out. Just because information is printed or displayed by a computer does not mean it is right. We must apply common sense to avoid being misdirected accidentally.

 

AN OPPORTUNITY

Executives and CPA's, there may be an opportunity here. Businesses need good, affordable accounting; CPA's want more ways to serve their clients; and we can figure out what its worth. Business owners and executives, instead of employing full-time personnel to do a part-time job, or worse yet, having work done badly; consider the possibilities of outsourcing more accounting work and/or management to skillful providers.

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