Charles Holley, retired CFO of Wal-Mart, said CEOs want CFOs who are:
- Expert influencers
- Strong Communicators
- Tireless agents of change
Nowhere on this list are there “competent accountants”. The controller-style CFO has fallen out of favor, particularly in private equity environments, where fund sponsors believe accountants lack the ability and strategic sensibility to help scale the business.
To those who argue that CFOs should be more than competent controllers, we wholeheartedly agree. But, to those who diminish the importance of capable, strategic, and competent technical accounting as an essential part of finance, we say, listen up: there is simply no better partner than accounting. to achieve the desired financial results.
A good partnership with accounting will help provide an accurate reflection of financial results and expected returns. A great partnership with accounting will actually help generate and influence those financial results (legally, of course).
This last type of partnership is rare. In too many companies, it is only after the completion of a transaction or the adoption of a new standard that accounting is asked to provide its “official accounting response” (sometimes expected but often against , and sometimes even the other way around). the projected/assumed impact of the company).
Indeed, many fairly common business scenarios have unforeseen accounting implications. We call these scenarios “accounting accidents”. The solution to such a scenario is not complicated: it involves involving the accounting team in the process at the beginning, rather than at the end.
This is an especially important lesson for companies that engage in the three scenarios that tend to be the most accident-prone accounting.
To acquire or not to acquire, that is the accounting question
In fact, it is not. The accounting question is really: what exactly are we acquiring? An asset or a business? This determination is essential, if not always clear. The categorization of acquisitions has measurable accounting implications: from the recognition of goodwill, to capitalized or expensed transaction costs, to the treatment of in-process research and development activities.
When considering the accounting approach to acquisitions, it is also essential to understand the impact of debt and equity financing as well as the consequences of minority shareholder rights. These factors determine whether the entity will be consolidated (affecting revenue and expenses) or accounted for using the equity method (affecting only the margin).
In any case, partnering with accounting during due diligence (prior to committing to a transaction) will not only better educate stakeholders on the financial implications of an acquisition, but can also inform on how to structure the transaction to achieve desired financial goals and key metrics. Here, accounting can help structure transactions to generate favorable financial results, not just record them.
2. To recognize revenue now… or later
Whether it’s a more favorable exit valuation or some other desired outcome, let’s say your business wants to increase revenue now (and who doesn’t?). Incentives that will attract additional customers seem like a smart way to achieve this goal. But here, accounting accidents abound.
Take extended customer payment plans, for example. A successful customer relationship strategy? Sure. Successful high-end income generator? Not really. In fact, extended payment terms may end up reducing income, as some of it could be classified as interest income.
Customer promotions (free services, discounts) may also impact the timing and amount of revenue recognized. Additionally, the terms and conditions of reseller and distributor agreements may not only delay recognition of revenue, but also affect whether it is recorded gross or only net in the margin. With the adoption of ASC606, the new revenue recognition standard, it has never been more important to pay attention to termination clauses and contract amendments.
When revenue is a key metric and timing is important, early involvement of the accounting team will be essential to ensure that payment plans, incentives, and vendor agreements are structured accordingly. In fact, that may be the difference between bottom line success and crash.
3. Renting under another name… is still renting
This is the impact of ASC 842, which places almost all leases, whether operating or capital, on the balance sheet. This should not mislead companies into believing that leasing structures will not have meaningful bottom line implications. They will and they will. Finance leases, for example, can have a positive effect on EBITDA, but (accounting crash ahead!) they can have an equally negative effect on debt covenants.
Too often, accounting is given the accounting task of recording the financial obligations of a lease and meeting them. It may not be the wrong role, but it is certainly a misuse of the real value of the function. The smart business (and CFO) uses accounting to advise on leasing options (prior to signing) to ensure that leases (and supply/service agreements that might contain an asset “leased”) are structured in a way that will benefit critical business parameters. (or, at a minimum, will not damage them).
Accidents happen. But accounting accidents don’t need to.
Sophisticated CFOs not only understand the value of technical accountants in accurately reporting decisions made, but they partner with them to provide proactive guidance for the decisions that remain. Here, accounting can generate the desired financial results, while moving away from unforeseen, but all too common accounting mishaps.
Shauna Watson is the Executive Director of Accordiona private equity-focused technology and financial advisory firm.