Momentum Podcast: 83
The Dumbest Advice Accountants Give
by Alex Charfen
Last week, I had massive, overwhelming anxiety. Here's why, I was sick. I was actually sick from before the 1st of July, until about Saturday or Sunday, so over seven days.
It is horrifying how often one of my client comes to me after they've been given terrible advice from their accountant or bookkeeper. While there are some good finance and accounting people out there, there must be a class somewhere in the accounting curriculum called “dumb advice to give entrepreneurs.”
The problem with this is that accountants are seen as business professionals who should be giving advice and most of the time it gets followed. I have worked with enough entrepreneurs that I can sum up the worst accounting advice in one podcast.
If you have an accountant who has told you one of these things, send them a link to this episode.
Full Audio Transcript
I'm Alex Charfen, and this is the Momentum Podcast. Made for empire builders, game changers, trail blazers, shot takers, record breakers, world makers, and creators of all kinds. Those among us who can't turn it off, and don't know why anyone would want to. We challenge complacency, destroy apathy, and we are obsessed with creating momentum so we can roll over bureaucracy and make our greatest contribution.
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Welcome to the Momentum Podcast. I'm excited to be here with you today. This is, the title of this one is, "Dumb Advice Accountants ..." Or sorry, "The Dumbest Advice Accountants Give." Now, before I get into this topic I just want to share with you my personal experience with accounting and finance. If you're an entrepreneur building a business, this is going to be the most difficult department for you forever once you hit about a million dollars. Because, here's what happens. You get to the place where you need someone to help you with your books. You need accounting and finance, but you're not big enough that you can actually get what you need yet. And so, you're not big enough to bring in a bookkeeper and an accountant. You're not big enough ... Because, that's what you need.
Internally it's hard to staff these positions. I've tried everything. I've grown a lot of businesses. I've had a combination of a bookkeeper, and an accountant. I've had a combination of two book keepers. I've had a combination of a bookkeeper, and a VP of finance. I've had book keeper, analyst, VP of finance. And, trying to get what we needed in this department. Here is the challenge, there is an asymmetrical growth curve of accounting and finance to the rest of your business.
It doesn't grow at the same rate. It doesn't grow at the same pace that the rest of your business does. It will actually have times where accounting and finance, you need it to throttle up and get a whole bunch of stuff done. You've just increased your sales volume, you've increased how many products you're selling, and then it needs to come back down. It's so hard to stick the landing on having the people who cover this department.
I want to start with just saying this is one of the hardest parts of business for me, and then here's what happens on top of that. My clients come to me all the time and they tell me about the terrible advice they've been given. I'll share some of it with you today. Just how about a few days ago, that's why I'm doing this podcast, because it's so constant and so consistent that I want to wake all of you up and let you defend yourself against this advice. I'm serious, there has to be a class somewhere in accounting or book keeping school where they have dumb advice to give entrepreneurs. Because, it just doesn't make sense.
If you're an accountant, or a book keeper, or a finance person and you listen to my podcast first. Thanks for being a member. I'm sorry that this sounds like I'm judging all accounting and finance people. I'm really not. I'm just judging the ones that give really bad advice. I also have a chip on my shoulder about accounting and finance. Cadey and I, one of the most difficult things we've ever been through in our lives was when we found out we had over a million dollars embezzled from our company by a trusted advisor, and what we thought was a friend. Michael Goldberg, who ... From Boca Raton Florida, who used to fly out here and was just taking money from our company. It was because he was in the position of finance. He was in the CFO position, and it gave him the ability to embezzle from us in a way we probably wouldn't have ever caught if it wasn't for an analyst I had named Elliot Boney, who was just obsessive about our numbers.
After that experience, after a whole career of trying to staff accounting and finance, having it always be HR issues, having ... Never having the books up to date, never really having everything I wanted. If you've grown a business past a million dollars, you know exactly what I'm talking about. It's like they get behind, you don't get your books on time, you don't get the closed business on time. Then they're giving advice that you don't really even know if you should take. Here's what happened.
After we got embezzled from, it became my mission to get this position out of my company, figure out how to outsource it, figure out how to cover it in a way where I didn't have to staff accounting and finance. And then, also I wanted to make certain that my clients didn't have to do this. I wanted to figure out a way for all ... 'Cause, I help businesses go from a low seven figure run rate usually, or just below maybe a million dollar run rate. To, where they get to 10 million dollar businesses, 20 million dollar business, 50 million, 100 million and beyond.
I want to help them do that without having to have accounting and finance in the building. Because, guys, it's numbers. Yes, there are CFO's who can give you advice. But, until you're a substantial company, you need very little of that advice. Cadey and I have solved this issue for now, and forever, and several of our clients have too. We use an outsource company here in Austin called Consero, which is amazing because we have a team of four book keepers. We have a manager who oversees the, there's a team overseas. We have a manager who works with that team overseas so that our books are done every single day. They are never late, because there's four people on our account. There's a manager overseas, there's a manager here in the US we work with. The team there is amazing.
We have our books like clockwork, because there's an entire team dedicated to getting it done. We can scale past nine figures and still use them. Here's why I want to keep accounting and finance out of the building, because you don't, as an entrepreneur, we're all uncomfortable with it. When we get the right advice here, it actually makes it feel like momentum instead of like, "Oh man, the finance guy is coming." Mason Ludlow, a very wise consultant that I think about all the time used to say, "Those who count beans get hungry." He used to tell us, "Hey, you don't want all these people in the building who are accounting beings. You don't want a lot of accounting and finance. You don't need this." He was right.
Here's some of the advice that accountants give you, and I want you to start really thinking about this before you ... I want to give you the real math. The first one is the infamous, should I lease or buy a car? Every time one of my clients comes to me and they say, "Ah, I just signed a lease on a new $150,000 Mercedes." I get pain in my chest, because here's the problem with the accounting advice here is, what they say is, "If you're a business owner, leasing is better than buying because you can write off the full lease payment instead of depreciating the car."
If you compare buying the $150,000 car to leasing the $150,000 car, then there is a difference ... There is what appears to be an on paper advantage. But, here's the challenge. What accountants never do is say, "Hey, there's another option. Why don't you buy that $150,000 Mercedes when it's about three or four years old, when it's lost 50% of its value. You pay $75,000 for it, you drive it for four years, you sell it for probably around 40. So, your cost of ownership is 35K instead of the cost of the lease, which is more than two and a half times that."
Here's why I coach my clients to increase their net worth. Net worth, net worth is everything. Why would you put money into a depreciating asset? You want to drive a nice car? That's fine. Just drive one that's a little bit older, and take that other money and put it in your net worth. Take the tens of thousands of dollars that, that bad advice will cost you, and put it to your net worth.
Here's another terrible piece of advice accountants give. You need to spend more because your margins are too high. Every time I hear that, I want to give them a pen and say, "Okay, there's the whiteboard. Now, you explain to me how we're going to spend our way to a higher payment to the owners of this company. I want you to show me how spending money is going to get the owners of this company one dollar more in their pockets," because they can't. It's a losing equation no matter what you do here.
Let me give you the real math. If you have $100 in profit, let's just use easy numbers. $100 in profit and you're in a 37% tax rate, that means that if you keep that $100 in profit and you pay your $37 in tax, $63 goes to your net worth. That's how business works. The responsibility of your business is to make you money.
Now, if you have $100 profit and you spend it. The $100 is gone. What we're hoping is that all the paperwork is done right, all the deductions are done right, everything is turned into the IRS correctly so that you have a $37 return on that $100 in the form of a discount on your taxes, a tax deduction.
What we're talking about is the difference between you making $63, or $37. You are always going to spend your way into making less money. Let's look at $100,000 profit. At 100K you're putting $63,000 in the bank. At 100K that you spend to save money, you're putting $37,000 in the bank. Do you know the difference? If you go just five years out and you look at where you are, especially if you have your money making money for you in any way, there is no way to argue for spending to lower your taxes. It's just silly. It's like some reflex accountants got somewhere. "Pay taxes bad, spend money good." Because, it doesn't make sense. It doesn't mathematically make sense.
Let's remember, that's what your accounting and finance person is supposed to be really good at. Then, here's the last piece of advice that I want to caution you about. The ... Right about this time of year, I start telling all of my clients, "Hey, I want to tell you. You're going to hear some bad advice from your accounting people in this quarter, and probably in the next six weeks." Right before Thanksgiving I usually start like this on calls. "Hey, you're going to hear bad accounting advice. You're going to hear really bad advice when it comes to your future with your business, and your net worth. Here's what your accountant's going to say. 'Hey, there's a big tax bill coming. Do you want to go spend some money before the end of the year?' And, 'Hey, you could get new computers, you could get new desks, you can start paying your teams expenses, you can get ... Do you want to give a bonus? You have a really big tax bill coming. Do you want to give a bonus?'"
It makes me so furious, because one, don't ever get business advice from your accountant. Let me say that again. Don't ever get business advice from your accountant, unless you have an accountant that's grown a business bigger than yours. The problem is, most accountants are single practitioners who can barely keep themselves in business, and they get asked for business advice and they give it. And, some of the dumbest I've shared with you, but spend at the end of the year is one of the absolute worst. Because, here's what you should spend at the end of the year. You should spend on everything you actually need. That's it.
You know why? Because, if you have $100 profit left, you paid $37 in tax, you keep 63. If you spend $100 because it's the end of the year, you only return $37 if everything's done right, and it comes back on your taxes. What is the job of your business? The job of your business is to increase your net worth every single year. Far too many business owners get confused here, and they don't increase their net worth. If you haven't put a plan in place to increase yours, go back and listen to my podcast on net worth. It will change the way you look at your business, and it will change the way you look at your life.
Because, here's what you should spend on the business, what it needs. Here's what you should spend on the business, what you have to have to lower pressure and noise for you, so that the business keeps growing. You should spend on the business what your analysis of that business tells you it actually needs. I mean, I just had a client this week tell me. She said, "You know, I had that conversation with my book keeper that you told me I was going to have." I said, "What do you mean?" She said, "You're running a business, high six figure business at 80% margins. You should spend more so that you don't make so much." Her book keeper told her, "You should spend more on ..." She said to her, 'cause she had already gotten my advice. She actually said, "What do you mean? Spend on what?"
She said, "Well, you could start paying the team cellphones, you could start paying for their home internet access, you could give everybody a bonus, you could buy new furniture." Maybe she didn't say furniture, but that's the type of stuff accountants say. They say, "Upgrade your furniture, upgrade your office, buy a new video system." Then some of them, they'll give you this under the table advice like, "Hey, if you want a new TV you could even buy a TV. If it ends up at your house, nobody's going to know." First, that's fraudulent advice. Just so you know. Any accountant who's willing to be fraudulent with you, I'm suspect of them. The fact is, that you should buy what your business needs, and then take the rest to net worth and spend your money so that it goes and makes you more money.
I think all of us aspire to the place where we don't have to work. Well, the way Cadey and I got to the place where we don't have to work, is we focused every month on what contribution are we making to our net worth? How much more is there? And, what is the money we're getting? What is the mailbox money? What is the money that shows up without us working? What investments do we have that are paying us? Have we hit that magic ratio where our passive investments exceed our expenses? We hit that, Cadey and I have been there ages ago. Especially today with some of the business investments we've made, especially with the one that I made with Price Gibbons. That one's doing amazing.
We wouldn't have been able to do that if I had taken bad accounting advice like spend more. We were able to do that, even though we got 1.3 million dollars embezzled. But, the entire time we were getting embezzled from, we were spending hardly anything so we were putting away money, and we were increasing our net worth. Quite frankly, part of the reason we were able to get over such a massive loss, 'cause it was about a 1.5 million dollar embezzlement. Michael actually involved his parents, Norman and Cina Goldberg who live in Boca Raton in the whole thing. We were able to recover some of the funds by suing his father for insurance policies Michael bought with our money.
But, he also had us buy some junk insurance policy, some other expenses. I even succumbed to some of this, and ended up with another misappropriated million. It was over two million dollars that we lost. The only way Cadey and I survived that entire episode in our families history, is that we had a massive war chest, 'cause we were 100% focused on a monthly basis on growing our net worth.
Here's the advice that accountants probably won't give you. If you have heard it from yours, it's a good one. Grow your net worth. Focus on taking as much money out of your business as you can, and still sustain that business. Invest your money in other things that pay you money. Buy investments that give you passive income. Buy into things that are going to pay you back. Make your money, go out and make money, and don't get caught up in being one of those entrepreneurs that says, "Oh, well I have to buy a new car every four years, so that's why I lease."
Be the entrepreneur that says, "I buy a four year old car so I can bank the net worth, and get to the magic ratio of my passive income exceeding my expenses." Because, here's what that's all about guys. It's not just about how good it feels to have that level of financial freedom. It's that, if you want to level up to the next place for you being an entrepreneur, if you want to start really getting to the place where things get interesting. Start growing your net worth, because you know who you are with the value you have had in the world so far. But, when you increase your net worth, when you build that financial cushion, when you grow how much you have in the bank. You won't recognize yourself.
Far too many entrepreneurs grow pretend net worth. They say, "Oh, I've got really nice cars." Or, "I've got nice watches." Or, "I've got a bunch of stuff that's worth money." Well, I've seen both. I can tell you that definitively, the entrepreneurs who have money in the bank, the ones who are sitting on seven figures, the ones who have access to massive cash because it makes them feel comfortable and calm are by far the ones that are more successful, more confident, more committed to their outcomes, and they create way more momentum.
That's the advice every entrepreneur should really hear, is grow your net worth. Don't try and spend your way to savings. It's like the joke where somebody comes home and says, "Hey, I saved us $200 today because there was a 20% off sale on comforters." No. You spent $800 that we may or may not have needed. In that case, it's so easy to see. Sometimes with accounting advice, we get wrapped up and we miss it.
If you are an entrepreneur and you're growing and scaling your business, and you're over a million dollars. You're in that place where you're getting the solidified team around you, and you want to become a transformational leader. Understand what you should be looking at in the business, how to grow the infrastructure within the business so that it grows, and you don't feel like you have to do everything. Reach out to us. I have a small group of entrepreneurs that are in a private coaching program with me. It is exactly for building that first foundational team that is going to help you grow your business. But, at the same time, growing the business systems, the tactics, the strategies, and the functional infrastructure that will get you from a seven figure business, to eight figures and beyond. Reach out to us, we'd love to talk to you. Thanks for being here with me today, I appreciate it.