In today’s world, accounting is now at the center of strategic decisions and value creation, compared to traditionally focusing on historical data and compliance for regulatory and lending purposes. Here are three ways how accounting professionals can help management make better-informed decisions, as well as recognize inefficiencies and opportunities to pivot or improve performance.
Leveraging Technology
Real-time, data-driven decision making is increasingly important in today’s competitive markets. In recent years, the need to pivot in response to unexpected changes — including supply chain shortages, regulatory shifts and geopolitical threats — has highlighted the importance of timely financial data for managing daily business operations.
Many organizations are using technology to automate manual tasks — such as invoicing and extracting key information from contracts — and streamline closing procedures at the end of the reporting period. This frees up a company’s accounting staff to be more agile and focus on value-added activities. This might include identifying trends from the data to understand what’s happening and determining how to respond quickly to minimize potential threats and take advantage of emerging growth opportunities. Accounting leaders also use technology to analyze data and influence environmental, social and governance (ESG) strategies.
The use of automation technology is expected to become increasingly important given the current shortage of skilled accounting talent and the high turnover rate in the accounting profession. The American Institute of Certified Public Accountants (AICPA) reports that there are fewer new accountants entering the profession: Accounting undergraduate degrees were down almost 9% from 2012 to 2020. In addition, the AICPA estimates that 75% of CPAs have plans to retire within the next 15 years.
Evaluating Investment Decisions
A key area where accounting professionals can add value is crunching the numbers to improve returns on capital investment projects. These investments — such as expanding a plant, purchasing a major piece of equipment or introducing a new product line — can add long-term value. Determining how much value a project will add over time is a natural extension of an accounting professional’s expertise.
Capital investments shouldn’t be made with gut instincts. Instead, it’s important to realistically project future cash flows. This requires several questions to be answered:
- How much revenue (or cost savings) will the project generate?
- What incremental expenses will the project incur?
- Does the project provide any special tax savings (for example, first-year bonus depreciation or Section 179 deductions)?
- How much incremental working capital and fixed assets will the project require?
- How long will it take to get the project up and running?
- How long will the project generate incremental cash flow?
Financial projections should look beyond the income statement and consider how the project will affect the company’s balance sheet. This helps management evaluate how much cash the project will need each period and whether internal resources will be sufficient to finance the project. Some projects will require the company to tap into the company’s line of credit — or require additional loans or capital contributions.
Using Financial Tools
Once cash flows have been projected, it’s time to analyze the results and prioritize competing investment alternatives. For example, you might have $300,000 to invest in either a new machine or IT upgrades. Which alternative is better from a financial perspective? Examples of financial tools that are used to evaluate such decisions include:
- Accounting payback period. This tells how long a project will take to recoup its initial investment and start generating positive net cash flow. For example, suppose you’re thinking about buying equipment that costs $300,000 and is expected to generate $60,000 of incremental cash flows annually. Its accounting payback period would be five years ($300,000 divided by $60,000). Most companies will pursue investments only if the investments meet a predetermined target payback period. The time value of money is a critical consideration when evaluating investments, but it’s ignored by the accounting payback period.
- Net present value (NPV). This tool discounts each period’s projected cash flow into its present value. The sum of the present values for all the periods equals the project’s NPV. If NPV is greater than zero, the project will generate positive cash flow and is worth considering. If not, the project may not be worthwhile. Typically, management uses the company’s cost of capital — or possibly a rate based on the risk of the investment — to discount projected cash flow.
- Internal rate of return (IRR). This estimates the point at which a project’s NPV equals zero. Management typically has a preset hurdle rate that a project must exceed to be considered. For example, if management sets its hurdle rate at 14%, any project with an IRR below 14% won’t be considered.
Unfortunately, these financial tools sometimes conflict with one another. So, it’s important to consider qualitative factors, too. For example, IT upgrades might also protect against cyberattacks and reputational harm, which may be difficult to quantify in financial projections.
Beyond Closing The Books and Issuing Reports
Accounting professionals possess the expertise needed to address the challenges presented by today’s rapidly changing markets. They can help take your company’s accounting department to the next level, transitioning your staff to become more forward-looking, value-driven, and collaborative with other business functions. Contact our CSH experts to discuss ways technology can improve the timeliness of your financial reporting and financial tools can maximize your return on capital investments, along with other ideas to add long-term value.
