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“[People should] shift away from the efficiency equals money approach,” said Reginald Lee, co-founder of Business Dynamics & Research. “Instead, look at it from the perspective of ‘If I'm going to reduce costs from a cash
perspective, I must do something different.’ It's not about implementing software and costs going down. It's not about bringing a consultant in, and costs going down. Something else is required for that to happen.”
PODCAST: Improved efficiency doesn’t always equal cash savings
Written on Jun 9, 2022
By Jessica Salerno-Shumaker, OSCPA senior content manager
CPAs should rethink traditional approaches to business improvements when the goal is to achieve more cash-based returns.
“[People should] shift away from the efficiency equals money approach,” said Reginald Lee, co-founder of Business Dynamics & Research. “Instead, look at it from the perspective of ‘If I'm going to reduce costs from a cash
perspective, I must do something different.’ It's not about implementing software and costs going down. It's not about bringing a consultant in, and costs going down. Something else is required for that to happen.” Lee spoke on ways to achieve maximum cash ROI on improvement projects during the State of Business podcast this week and will present a session on the same topic at the fall Accounting Shows. He said that when organizations look to make improvements, the tools they use will not calculate cash returns but instead what he calls “accounting returns.”
“Let's say that you've got someone who makes $50,000 a year, and a consultant comes in and says, ‘I can make them 10% more efficient’,” he said. “They claim a $5,000 savings. However, you're still paying the person $50,000 to be there. So, there are no cash savings. And what happens is we don't differentiate between these accounting savings, which can be tied to efficiency, for example, and cash savings, which are tied to money.”
Lee said it’s valuable for individuals to understand the difference and how it impacts the decision-making process if a business wants accounting returns or cash returns. He said he has spoken with a business owner who received a sales pitch that a certain type of software would save the business a lot of money. The business owner purchased the software, but they knew it wouldn’t generate the cash returns that the sales pitch claimed. They did it instead because it would increase efficiency and was best for the business.
This is an essential skill for CPAs to learn, Lee said, because it can help them coach their organizations to quantify investments to ensure they aren’t spending excess money on an improvement and not getting the cash benefits that are the goal.
He has written a book on the topic called “Project Profitability: Ensuring Improvement Projects Achieve Maximum Cash ROI” and said it’s helpful for CPAs to understand the risk of these cash-related decisions.
“When we think about promising benefits to companies in the work that we do, the idea is to make sure that we understand how the benefits will be realized,” he said. “It’s about knowing where the true value lies. CPAs can help their CFOs do that and it's going to improve the financial performance of their organizations.”
Listen to the podcast episode and hear more from Reginald at the upcoming Accounting Conferences. Register now.