I just looked the date of my last blog post and thought I better let everybody know that I am still writing and creating. A lot has happened over the last few months so I’ll quickly get you up to date on what I’m doing and where I’m going.

Creating golf content for Dr. Mo bit into my business writing. Besides its fun and I like it. When you realize that golf is a lot like life then it makes sense. In addition, the Colorado weather wasn’t real conducive to me setting down and grinding out a lot of boring business stuff. The real key here is that I’ve had time to figure out where to take http://www.northrupcpa.com/.

The site started out being focused on client services and my CPA resources and tools. Not that I won’t provide services or help other CPAs, but the real need seems to be entrepreneurs and business people who can benefit from all the knowledge and consulting expertise I’ve amassed over the years. Getting this information on to the web site and into books takes time, so it will be a journey.

I have started a new book for the self-employed entrepreneur together with support material that will be posted on the web site. In addition there is the Building Business Value™ content and approach that can help the new businesses grow and flourish. In addition I plan to turn my MBA course content into a book as well as develop a book on accounting and finance for business owners and entrepreneurs. I have been teaching  courses on these topics for over three years, so this is a no brainer. I’m not sure about the titles, but we’ll come up with something good. I have learned to do the back cover of the book first and then develop the content and title.

In addition to this blog, check the AccountingWeb blog and my latest post at http://tinyurl.com/3yrkwkz . There’s lots material on that site from other contributors in addition to my stuff.

This blog will become more active, I promise. In addition to writing books, I’ll be converting my content into new products and articles for the site. I have started to figure out Twitter and you can find me at @northrupcpa. Also, we’ll begin showing the tweets on the web site. I’m not sure I have enough to do!

It was fun sharing these thoughts as it provided me with a better sense of how to make the blog, the web site, and my content more relevant. Let me know if you have any ideas.

How valuable are CPAs to their clients? What do clients want their CPAs to do for them? These questions have puzzled me and frustrated me for some time. After giving this some thought I reached the conclusion that clients don’t receive value and CPAs don’t provide the value they are capable of delivering.Creating value lies in the pursuit and development of value propositions. Value propositions aren’t defined in the tax code or in generally accepted accounting principles, yet it is the secret to greater profitability which is created by providing needed and necessary services. Clients want more than taxes and accounting from CPAs. They want and need help with their businesses, especially when economic conditions are tough. This means defining customer value in terms of what services CPAs provide and how they do business with their clients. Here is where you can link price together with reliability, dependability, and convenience of the service provided.

Far too many CPAs provide a service, but miss out on providing and building client value. This occurs because they haven’t taken the time to develop the knowledge and understanding as to what clients really need. You need to ask the key questions of clients so you know what they expect of you and how they think you could help them address their challenges and opportunities. This most likely means the ability to provide them with management consulting in strategic and operational areas.

Developing a basket of services which provide value will allow you to value bill. This begins with understanding clients needs and translates into increased profitability for you relative to the hours expended. You now have a choice on what you charge because the client is receiving greater value from the services you provide.

You might end up servicing fewer clients and receiving greater revenue. Providing added value services to clients you truly want to work with ends up being a win/win situation. You can develop some ideas relative to the types of services by reviewing the list of services I offer both to clients and as resources to CPAs.

Employing a value proposition strategy to your practice is an effective way to re-engineer what you are doing by giving clients the services they need and want. Providing added value to clients puts you in the driver’s seat and lets you value bill in contrast to just being paid for the hours you charged to an engagement. It also creates a better overall client experience since it enhances the flow of communication and avoids difficulties and problems which can occur.

You can now start charging the maximum amount that a client is willing to pay which results in greater revenue and a more productive work environment. You will have happier clients since they now perceive they are receiving the value they wanted and are willing to pay for it. Your practice should grow because happy clients talk and this should translate into increased work. This is truly a way of working smarter and not harder.

Why not virtual consulting and business support? Since I have always performed consulting services at client’s sites, this represents an interesting question. In the current economic environment when every dollar counts it occurred to me that I could provide companies with excellent support and advice they might not be able to access in their geographic region. I teach on-line courses for Villanova University in conjunction with Bisk Education where I facilitate live discussion session with students every week. If I could teach on line then why not consult on line?After pondering the topic and the question, the answer seems pretty straight forward. Clients could really benefit from such an approach. In one of my recent live discussion sessions we had an extensive dialogue on the transformation of communication. Virtual communication is what has evolved in today’s world. Since we communicate virtually, then consulting and business advisory support represents a logical approach.

Telephone and e-mail are logical tools that most clients understand. The part which is a mystery to them is realizing that we can conduct an on-line dialog over the internet utilizing voice in addition to sharing of presentations and other analytical tools. It isn’t quite the same as face to face communication, but it works pretty well and is a lot cheaper and more time effective. It is an approach that works well enough to help a large number of clients. Virtual consulting can save time and reduce costs so traveling to client sites is limited only to the bare essentials.

In addition to reducing costs and improving efficiency, this approach saves a lot of wear and tear and allows me to reach out to a greater audience and expand my market reach. I can now help more people access my knowledge and expertise. I think this is a good way to work especially in a tough economic environment.

COSO issued new information and direction on monitoring internal control during January 2009 in a three volume publication titled Guidance on Monitoring Internal Control. Monitoring of internal control is performed through application of ongoing evaluations and separate evaluations to ascertain whether other components of internal control continue to function as designed and intended. These evaluations facilitate identification of internal control deficiencies. The deficiencies then need to be communicated to appropriate officials responsible for taking corrective action and where appropriate to higher levels of management and the board of directors.It is important to realize that business risks change over time. The internal control system must be capable of determining that the internal control system continues to be relevant and able to address any new risks. Monitoring should address requirements for revisions in the design of controls as risks change. It also provides assurance regarding the ability of the internal control system to contain risks at an acceptable level in order to provide for effective and efficient operations.

Monitoring follows a risk based approach in evaluating risks linked to achieving operational objectives. It is important to establish a monitoring foundation that includes procedures for evaluating risks, assessing controls, and reporting the results together with any required corrective action steps.

One of the primary elements of the monitoring includes establishing an effective tone at the top of the organization giving a high priority to an effective internal control system. Effective “tone at the top” ensures that the management team and the board of directors are supportive of the evaluation process. Successful monitoring of internal control requires the selection and utilization of evaluators who have a baseline understanding of internal control. They also will have the suitable capabilities, resources, and authority to conduct a meaningful assessment of the internal control system.

Since the enactment of the Sarbanes-Oxley Legislation I have developed multiple training programs dealing with assessment of internal control in addition to my book, Profitable Sarbanes-Oxley Compliance. Please feel free to contact me with your internal control questions and to discuss how to create and implement an internal control monitoring program.

It seems like economic crisis and tough times are all we hear about these days. In a recent publication of Accounting Today an article appeared talking about the need for CPAs to step forth to provide assistance to small businesses. We need to provide guidance but small business people have to make a paradigm shift and realize they need help. They have been used to going without financial assistance for far too long and CPAs have been too focused on tax returns and financial statement preparation. Change needs to happen if businesses are to survive. My web site contains a lot of information both business owners and CPAs can use to survive the recession.CFO and Controllers of larger companies are also in a survival mode. They are laser focused on cash preservation and cost reduction. The key areas of focus include the following:
1. Preserving cash
2. Reducing costs
3. Reducing risk
4. Understanding expenditure patterns
5. Plugging holes in the dike
Over emphasis and indulgence on these factors can lead to overlooking some potential opportunities.

I think small business and larger organizations are missing the boat by placing all the emphasis on cutting back and hunkering down. Risk management should include looking for opportunities in addition to potential risk events that could adversely affect the company. Risk management should include considering opportunities to do a better job of purchasing and improving visibility on spending. Cash conversion efficiency includes managing accounts payable and inventories. These two areas represent a significant source of extra cash. It deserves additional focus and effort that will produce extra cash and liquidity.

Risk management includes effective planning and development of value propositions. Reevaluation of business strategies must be addressed since the old business model has shifted. New product lines and new markets need to be evaluated. More than likely the old rules no longer apply. Survival will depend on creating new visions and new strategies. These strategies then need to be linked to new marketing and sales programs. One of my clients is now spending a significant amount of effort developing new products and markets because the streams of revenue that existed just a few months ago no longer exist.

Operations and strategic planning when combined with sound financial management concepts and methodologies represent exactly how businesses need to deal with the economic crisis. Linked to these concepts are lean accounting and value stream analysis based on the voice of the customer.

I think this back to basics approach is what is required to cope with the challenges we face and represents the road less traveled to build healthy businesses and an economy that will survive the test of time.

Management philosophy is synonymous with “tone at the top” and provides direction as to how the organization will manage its financial reporting and articulate its objectives relative to internal control. Management attitude sets the foundation for financial reporting assertions and the application of accounting principles. The philosophy and operating style of management determines how financial reporting objectives and risk mitigation practices are established and executed.
Many smaller companies have entrepreneurial management teams that don’t always understand accounting and internal control processes. Promoting the importance of risk mitigation and appropriate interaction associated with transaction processing requirements is an adjustment for management teams of smaller companies. In many instances, adjustments need to be made so that all journal entries, together with the underlying assumptions and estimates, are properly authorized and supported by sufficient documen¬tation. Management operating style trickles down to employees, so there needs to be clear communication and application of business judgment so that qualified personnel are in place to perform effectively designed controls. It is critical for smaller organizations to ensure that management communicates effectively with employees as well as external parties relative to information linked to financial reporting objectives and the necessity for accurate and fairly presented financial reporting. Management needs to take financial reporting and internal control seriously by setting a “tone from the top” that is understood at all levels of the organization. Management philosophy and operating style needs to be “do as I do” and not just “do as I say.”

Lean accounting is a mystery to most business people and accountants. They have heard of lean manufacturing but not lean accounting. Lean accounting evolved in the manufacturing environment and hasn’t made much progress into lean thinking applications. There are a number of ways lean accounting can be applied in a variety of situations. It is perfect for managing and measuring results in tough economic times.Initially lean accounting got traction because it had the capability of overcoming the problems associated with standard costing. Standard costing is driven by labor efficiency, machine utilization, and absorption of overhead. These standard cost techniques were traditionally used by managers to build excessive inventories and generate positive variances to improve GAAP profitability leading to higher management incentive bonuses.

The economic recession has created a need for lean accounting. However, since most accountants haven’t use lean tools, the application goes unused. Lean accounting deals with tracking throughput or revenue and the associated variable costs required to generate those sales. Understanding that lean contribution from sales directly improves the bottom line is critical. You don’t spend funds unless it is associated with generating revenue. Since lean accounting provides better information for decision-making it has the impact of increasing sales. In a slower economy, companies need tools like value stream costing and similar lean-decision making applications.

Lean accounting financial statements are easier to understand. Since the focus is on the value stream linked to the voice of the customer, lean encourages measurement of drivers that produce value that customers want. Based on lean thinking, we are only incurring costs to produce customer value. We know the cost of the form and features demanded by customer. Costing techniques include target costing and analysis of the life-cycle of products. These approaches utilize continuous improvement techniques focused on improving our profit margins.

Since most managers relate lean accounting to manufacturing, the tendency is to ignore the concepts of lean and lean accounting for non-manufacturing applications. These areas represent the most lucrative opportunities for lean thinking and lean measurement. There are significant opportunities to lean our administrative and other overhead areas of organizations. Service, health care, and other industry sectors are leaving money on the table by not using lean thinking and lean accounting.

There are plenty of ways to apply lean thinking to accounting and financial operations. The use of simplified financial presentation and measurement can represent significant improvement in time savings and better decision-making. One of the concepts I advocate is sales and operational planning linked to rolling forecasts that virtually eliminates the need for annual budgets. This is a process of getting the entire organization to commit to a regular process of monitoring and communicating the most up to date information available and converting it to meaningful and actionable information. Rolling forecasts provide a simplified lean measurement of the organization and where it is going on a timely basis. It becomes a real-time basis decision making tool.

These concepts are discussed and explained in my book, Dynamics of Profit Focused Accounting. A lean front office is no different than a lean shop floor manufacturing operation. It is all about process flow and eliminating the waste from the value stream. The problem lies in the lack of education and inability to shift paradigms to a new lean way of thinking.

How much appetite for risk does an entity have relative to its pursuit of value? Each entity has to develop its own appetite for risk. This will depend on achieving an acceptable balance between growth, risk, and return and creating the proper relationship between risk appetite and strategy.

Effective risk management and execution of strategy requires appropriate alignment of people, processes, and the supporting infrastructure of the organization and process owners. Appetite is linked directly to strategy and is aligned with the desired level of value creation. Different strategic options will evolve based on the assessment of risk attached to each strategy. Therefore, management style and approaches to strategy will drive varying levels of appetite for risk-taking. When setting strategy, entities will vary in their approaches to risk. Qualitative approaches will categorize the entity’s appetite for risk as green, yellow, or red (high, medium, low). Entities that employ a quantitative approach will consider appropriate goals for growth, return, and risk. Risk management helps the management team choose strategies that blend with the organization’s goals for creating value.

There are a number of considerations that impact an organization’s appetite for risk. These factors will vary from business to business. It boils down to what risks the business wants or is willing to accept and what risks they want to avoid. The desired rate of return on initiatives is one of the factors that will influence risk appetite. Risk appetite will be affected by the current rate of return and the competitive need to accelerate growth. The strategic focus of the entity will directly impact whether a company has a high or a low appetite for accepting risk. Risk management needs to consider the organization’s appetite for risk and then guide management in selecting and balancing their decisions in their choice of initiatives and allocation of resources. The tolerance for entity-wide risk will then enter into the selection of objectives in the pursuit of its strategic vision.

Risk tolerance and appetite represents a balance that helps keep businesses and organizations on course and helps to avoid unnecessary and avoidable surprises. It is like walking a tightrope and then deciding how high you are willing to be, in case you fall.

EVA^TM stands for economic value added. It is an economic value-based model to measure performance. It is a metric that holds businesses accountable for the cost of capital used in the business and determines whether or not real value has been created for the owners. The calculation is determined by subtracting a charge for the full cost of capital which includes the equity and debt from the net operating profit after taxes. The method adjusts for accounting distortions such as intangibles and gets back to a cash basis or an economic model of profitability. This is important because it focuses on what is really critical in this economy in contrast to GAAP accounting-based measurement.

If EVA^TM is a better measurement of value creation, why is it better? The underlying principle of any business is that it must provide a profit that is great enough to justify the cost of capital used in the business. In other words, a business needs to create a surplus of profit after covering all of its costs. Until a business has earned an economic profit, it has not really generated a profit. When the net economic profit of the business exceeds its cost of capital employed, positive value is created. If net economic profit is zero or negative, then value is lost.

In its simplest sense, there are only three ways to increase economic value:
1. Increase operating efficiency
2. Only undertake investments that add value
3. Get your capital out of investment activities that don’t add value
By simplifying your focus, one develops a much better grasp of how value is being created or not created.

All too frequently managers are making decisions without considering the cost of capital in making their investment decision. They also think they are making a profit, when in fact; they are losing value by not covering the total cost of capital.

It is critical understand the reality of whether or not you are making an economic profit. If you can’t earn economic, cash based, profit, then why pursue the investment or continue the business?

Well 2009 is here. Now we have a chance to put the trauma of 2008 behind us and move forward to new beginnings. I already have. My goals are set and I’m moving on to where my dreams are going to take me. 2008 was a pretty good year for us. First and foremost was creating the new look to my web site and this blog. That said, there’s even more to do now 2009 is under way.

My advice is always to be patient, focused, and disciplined because in the long run this type of thinking and action is what gets the job done. This motto combined with a habit of always set goals and objectives is crucial. Then you need to monitor your results and adjust as quickly as possible if things aren’t going the way you anticipated. It’s a process – and not a short one.

Some of the things we are pursuing for this New Year include actions in multiple areas. I want this blog and web site to be an authoritative resource for CPAs, family businesses, and retirees as they navigate the difficult journey ahead. My plans include new training programs, up to date information on the potential adoption of IFRS, solid support for building business value, and guidance for family-owned businesses seeking to develop succession and transition plans to a new future. Plus all the other material we have always provided.

A new mission will include retirees and those looking toward retirement. This will include a new book and lots of guidance on how to make the transition. I am flunking retirement, but have put ourselves into a place where I can play, work, and live like I always dreamed we would. I learned a lot in making our journey, so it’s time to share this knowledge and information with others. I hope you will enjoy and benefit from this initiative.

Well, Happy New Year and stay tuned as we move forward and enjoy! We’re looking forward to the challenge that lies ahead.