"Ten ways to add value "

The accountant as choirmaster

Accountants essentially crunch numbers, right? Wrong. As one accounting professor at HEC Montreal used to tell his students: “A real accountant doesn’t just align numbers in rows and columns, he makes them talk. Better still, he makes them sing.” Here are three basic songs in the accountant’s repertoire.

Bean counting plus At face value, the simple preparation of financial reports could be considered a low-value service. “We could make the analogy with a physician who hands you an X-ray in an envelope, with no diagnosis,” Lavigne says. “You would have a snapshot of your bodily situation, but no idea of your health. Do I have pneumonia or just a bit of bronchitis? Can I run next week’s marathon or should I spend that time in a sanatorium? If the accountant doesn’t give a reading of the strengths and weaknesses of the company, it’s worth very little.”

If you don’t propose solutions, a diagnosis is not enough. “Does the company underutilize production capacity?” Lavigne asks. “Then it should increase sales by launching a new product line or aiming for an export market.”

But beneath the surface, the basic preparation of financial reports can involve a lot of added value. “There’s a lot of value simply in giving an SME the exact report it needs,” Lavigne says. “For example, an obvious question is: should it have reports in line with the new IFRS rules or with Canadian GAAP? What level of credibility do you need to give them: a basic notice to readers, a review engagement or a full audit report?” Just sorting out the regulatory constraints that underpin that choice implies a refined level of knowledge on the accountant’s part.

But added value lies deeper. Of course, for a majority of private SMEs, the banker is the most important user of their financial statements. As such, an accountant can make a valuable judgment call by determining the right level of certification that will satisfy the banker and may even cost the company less. But that call can integrate still more elusive factors. “There is an increasing tendency on the part of creditors,” says Lavigne, “to ask for less sophisticated statements with lower levels of certification and to depend on lending criteria [other than the annual report], such as the company’s capacity to repay debt, the competence of the entrepreneur and the personal guarantees he can contribute.” Juggling all these factors and gauging the right type of report increasingly constitute a high-value service.

Strategic bean counting Obviously, there are levels where ac-counting goes beyond report preparation and reaches the heights of strategy — if not art. This is what Pierre Bélanger, president of Dagua Inc., witnessed while working with an external accounting firm. A startup firm, Dagua has attracted major investment partners with its groundbreaking self-contained water filtering station, which uses ozone rather than chemicals to make contaminated water drinkable.

 

With a few simple manoeuvres, the accountant changed the company’s financial position. Dagua was spending a lot of money promoting its product before it was ready to come off the production line. “We were showing heavy losses,” says Bélanger.
 

A seasoned businessman, Bélanger did not see how he could present more favourable statements. The accountant took advantage of special laws applying to startups to capitalize marketing expenses that were going to show results in only three or four years. “We transferred more than $2 million in expenses and showed results that were much better aligned with our company’s position in a startup’s life cycle,” Bélanger says.

Duff Jamison, president and CEO of Great West Newspapers in Edmonton, benefited from a similar strategic input from his auditors when they were applying formulas to test if goodwill had been impaired with the recent economic downturn. At face value, a few divisions seemed to have suffered. “But formulas can’t ask why or what was the purpose in carrying out this operation,” says Jamison. “If an accountant is attuned to your business and understands your strategy, it can bring a lot of value, and that’s why our accountant was able to eliminate impairment at one of our divisions.”

Fiscal optimization The puzzles and pangs of fiscal regulation form a battleground on which accountants appear like heroes to entrepreneurs. Consider R&D credits. “Of course the company needs to keep informed on fiscal matters,” Bélanger says, “but when it comes down to the nitty-gritty of numbers, an accountant’s help can be more than precious.”

His accountant’s expertise came through when Dagua was audited by both provincial and federal revenue agencies. “When these people started to challenge us and throw tricky numbers at us,” says Bélanger, “[our accountant] was able to answer their rhetoric and show that the laws allowed us to claim many expenses. We particularly appreciated his devotion and the way he was ready to go the full distance on touchy issues.”

 

Diagnocure, a well-established biotechnology company in Quebec City, benefited from the fiscal expertise of a large ac-counting firm. “During the corporate restructuring, it made a difference,” says financial manager Frédéric Boivin. When Diagnocure bought a firm in the US and opened a US subsidiary to market its new diagnostic test, it faced conflicting scenarios. For example, it could incorporate the companies in the US, create limited partnerships, make one company dependent on the other, or liquidate both and control everything from Canada.

 

“We ended up forming a limited partnership for the company we bought out and set up a general partnership with the one we created. When the general partnership will have fulfilled its objective, it will absorb the limited one and, as profit shows up, it will be transferred to the parent company in Canada to help it cover its losses.”

 

The company’s lawyers were against the limited partnership solution because it exposed the Canadian head office to possible lawsuits originating in the US. “But the fiscal advantages our accountant unearthed won against the legal disadvantages,” says Boivin.

 

Leaving the numbers behind Business is not just about numbers. It’s about strategic planning, making tough calls based on partial information and building markets. But because the accountant knows the numbers that underlie all these activities, his or her counsel can be extremely valuable

Mastermind “We do a lot of strategic planning sessions with presidents and vice-presidents of clients’ companies,” says Yves Nadeau, an associate at RSM Richter Chamberland in Montreal. “We go over countless subjects: the most important areas where a company needs to make progress, increasing revenue, optimizing operational efficiency, opening a new line of products, making the organization chart leaner. Currently, there are lots of discussions around inventory reduction, cash generation and cost cutting.” All quite remote from traditional accounting columns.

Strategic planning should be conducted every three to five years and the plan should be reviewed annually. This is where an accountant can play a key role by challenging the plan’s objectives and the assumptions underlying it. For example, is it time to branch out into a new product line? Does the firm have the necessary production capacity? How will it impact client support?

But Nadeau suggests an accountant can go even further than the planning phase. “Execution is as important as planning,” he says. “There’s a client I work with where I act as the watchdog of the strategic process. We meet every six weeks to review what’s been done to implement the strategic plan. The client has formed teams around his strategic objectives and they report to us on their evolution. They are compelled to deliver results.”

The art of the deal Because you don’t sell a company 25 times in a lifetime, says Nadeau, better do it well and get the best help available. In fact, he says, preparing for a sale is a long-term project. A company needs stable revenue, a well-diversified client and supplier base and it must show potential to a prospective buyer. An accountant can help on all points, and even more in high-lighting the company’s potential: showing synergies with the buyer and promising projects on the back burner, for example.

 

Another area where an accountant can play a major role is in making sure the books and the company’s activities don’t hold any nasty surprises. “That undermines the relationship and can be fatal,” Nadeau says.

 

But an accountant’s greatest input is in setting a selling price for a firm. This is a sensitive area because entrepreneurs typically tend to overestimate the value of their company, says Grant Robinson, partner at Robinson & Co. in Guelph, Ont. Robinson remembers an owner who regretted refusing one fair offer. A few years later, he was forced to accept a purchase offer 50% lower.

 

Jamison found his accountant’s expertise particularly helpful when he bought out previous partners Southam Inc. and Hollinger Inc. “These people had way more firepower than I did in negotiations and could outgun me,” says the publisher. But the presence of the senior partner from his accounting firm helped level the playing field and the terms of the deal ended up more favourable to Jamison than he had anticipated.

 

While an entrepreneur may sell a company only once, chances are he or she might buy a few in his or her career. To a large extent, buying is a mirror image of selling. For example, the due diligence process tries to unearth the same unpleasant surprises you want to avoid in the sale pr0cess, and you have to negotiate a fair price. But in the purchasing process, there are other considerations — how to finance the purchase, formulating clauses that will guard against hidden vices, proposals to gain management’s loyalty — where the accountant’s advice can be crucial. It can also be vital in another area: understanding how the integration of the two firms will be carried out after the deal is closed and ensuring it is done swiftly and efficiently.

Modelling and business models Another natural area for accountants is in formulating the business plan. Although marketing, manufacturing and distribution may not be the accountant’s specialty, setting management compensation or determining capital structure are.

 

Dagua found its accountant’s high value area was financial forecasting. “His expertise proved essential,” Bélanger says. “Sure, management knew what the money inflows and outflows were in a few areas, but those represent maybe 10 out of 60 lines in a spreadsheet. We were at a loss concerning the way to account for cash flows around real estate, purchases, diverse depreciations and sales tax inputs. Our accountant knew

Underlying the business plan, the accountant finds the business model and the key question it seeks to answer: what are the basic ways the company generates revenue and profit? “This is a huge area,” Robinson says. “There are so many changes going on out there, the company must question and find ways to capture opportunities.” Obvious questions include: what parts of the firm should be outsourced? Should a company relinquish its manufacturing role to become only a design office or a distributor? What about online commerce? How do you balance marketing between brick and mortar stores and online stores? Do you invest in publicity online or in traditional media?

Four emerging trends

Specialists have identified four areas at the periphery of the accountant’s traditional role, where his or her qualifications al-low him or her to outperform any other professional.

Where do costs hide? While a company doesn’t always have control over prices, which depend on market forces, it can control its costs. That’s why, in times of economic hardship, many companies look inward to try to improve their cost structure. Unfortunately, “too many SMEs don’t even know what their costs are,” says Lavigne. “Their cost accounting is nonexistent.”

 

“Because companies have no idea where their real costs lie, often profits stay flat even when sales rise,” says Christian Babbini, vice-president at Decimal, in Longueuil, Que., which designs cost-accounting software for SMEs. “This happens because they don’t know which clients and which products are most profitable and they don’t invest their efforts where they can be most productive.” According to Lavigne, cost accounting is where accountants can make a real difference, but it’s also an area they neglect to promote to their clients.

Taming the risk devils Managing the risks a company confronts is something people do intuitively, but Nadeau says it should be structured and carried out systematically. Drew Byers, president of Edmonton-based Byers Butler Insurance Ltd., describes the issue in stark terms: “If I’m hit by a bus, what happens to the company, to clients, to partners? Such questions helped us put things in clear focus and forced us to design contingency plans.”

 

Nadeau’s specialty is to identify risks that lie at four levels (strategy, operations, finance and legal conformity) and to mitigate them. He gives the example of a company that wants to expand into the US, something many Canadian firms have undertaken in the past few decades with costly outcomes that could have been avoided by evaluating risks more adequately.

 

“At the operational level, we will look at the dependence the company has on certain machinery or on a supplier or distributor,” Nadeau says. “We look at the impact currency exchange levels can have. There are methods to evaluate these risks, establish their level of probability, number them in dollars and find ways to mitigate them.” Who but an accountant can do this better?

All in the family Succession in family businesses is a major issue and will be for the next decade. “With the boomer generation, we will see the biggest transfer of wealth ever; between $10 billion and $15 billion,” says Barns. The challenge is heightened by the fact that, since boomers had children later in life, the next generation is not yet of an age to take the mantle.

 

Accountants are uniquely qualified to address many issues in family successions, says Robinson, whose firm specializes in such succession issues as estate freezes, valuing the business and transferring shares. But the real value accountants can bring is in the soft skills of dealing with people, emotions and egos. “It’s about dealing with the elephant at the table,” says Barns. For example, son John is an alcoholic and making him CEO would compromise the company. Those kinds of issues ruin family businesses and accountants have to address them, explains Robinson.

 

The 100-year-old company Byers heads has had plenty of practice in transferring the reins from one generation to the next. It is now in the fourth transfer as the presidency moves to Byers’ son Scott. “Because we’ve done it before doesn’t mean we can’t go wrong,” he says. The key, he insists, is communication and ensuring everyone knows where the company wants to go.

 

Communication is not necessarily the primary competence of accountants, but those who take it up can make a significant difference for clients facing a succession challenge.

May the network be with you An accountant’s greatest asset might be his or her network. Large firms have an advantage in this respect, but smaller firms can compete by partnering with other firms to create high-value informal networks.

Entrepreneurs typically work in a multitasking mode to find information, financial contacts and employees. “And for this they need to have access to networks,” says Ted Mallett, CFIB chief economist. “An accountant is a key resource for this.”

And networks bring a number of things to the table. A company looking for capital can use an accountant’s network to find financial angels, private equity firms or strategic partners. Ernst & Young partner Colleen McMorrow suggests that a company looking for a growth path can ask what similar firms are doing and how it can leverage the experience and perspective accountants bring. “Such an added value can be huge,” she says.

Adding all the services, the full value an accountant can bring to SMEs is even greater. In fact, the whole is so colossal, you may wonder how accountants remain so unassuming.