Moving Forward by Going Backward

By Christopher Young, The Red Maple Group  – October 19, 2022
Moving Forward by Going Backward

This article is the second in a two-part series on differentiating oneself from competitors. It follows on from “The Trusted Strategic Accountant” in the summer 2022 issue of New Jersey CPA.

As a professor in a business school, it hurts me to say that business education is foundationally skewed toward a dysfunctional version of capitalism that evolved beginning in the late 19th century with the suggestion of something called Social Darwinism. Putting aside a gentler idea of capitalism as expressed by Adam Smith in The Theory of Moral Sentiments, capitalism evolved into a dog-eat-dog phenomenon, where the only attribute of a business’s value is cash flow, and the only outcome that matters is winning against competitors. Dr. Gordon further emphasized this idea in his development of the Gordon Growth Dividend Discount Model, where the value of a business is predicated exclusively on the cash flow it provides to its shareholders. Essentially, the value of a firm is equal to the summation of forecasted risk-adjusted cash flows in perpetuity.

A New Model

Thankfully, this idea of Darwinian Capitalism is starting to lose favor, especially among the younger generations of businesspeople. Rather than focusing exclusively on financial record keeping, more enlightened pro­fessionals also report on other important variables, such as employee and customer satisfaction, product or service quality, environmental damage and philanthropy. This reinforces the one important ingredient missing for most companies: recording other variables of importance aligned with their mission.

This idea modifies the Gordon Growth Dividend Discount Model. Rather than the value of a company equaling the future cash flows, the value of a business should be reexamined to include all other notions of societal profit predicated on the business owner’s mission. The value of a company is unique to the business owner’s mission, vision and values.

Historically, the value of a business (V) is equal to the summation (.) of risk-adjusted profits (P). I suggest that business value should be equal to the risk-adjusted financial profits plus the risk-adjusted value of good social profits (SG) provided by the company to others. Essentially,

V = ∑ (P) + ∑ (SG)

Putting it into Practice

So, how can the strategic CPA use this idea? First, understanding the goals and desires of a business is paramount to developing a long-standing, high-value relationship. The CPA can continue to challenge business owners or senior management in their thinking when they suggest a rash or illogical decision that may take the company away from this goal.

Second, the simple formula above will help the strategic CPA think through the most critical aspects of a business. Perhaps the company vision is to provide the highest quality products in the industry. The strategic CPA can record measurements so that the business can stay on track in obtaining this goal. Perhaps the business strives to offer the best workplace for employees, with great pay, high safety standards and the best quality of life. The strategic CPA can work through the development and record keeping of variables and metrics to assist in tracking these goals. 

It has been shown that companies with strong ethical brands drive even higher yields. CPAs can help their company or their clients create a more ethical brand, suggestive of a company that records more than just profits. Talk to clients or senior management about their individual goals and the company’s purpose. Find out about the legacy they want to leave. The trusted strategic CPA is that person who moves past the statutory deliverables, the conversations of Sunday’s football outcomes, and moves into the desires of their clients or employer. These conversa­tions often do not evolve overnight, but it is a must if you desire to be the strategic CPA who leaves a legacy in this world.

Get deeper, ask the hard questions and help move capitalism toward an ideology that is primarily about improving the lives of everyone. Value is unique to each company and each business owner; know what makes them special and help them drive more value from it.

Christopher  Young

Christopher Young

Dr. Christopher Young, MBA, MAFF, CVA, is associate professor of Professional Practice at Rutgers University and the founder of the Red Maple Group, a full-service economic firm.

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This article appeared in the fall 2022 issue of New Jersey CPA magazine. Read the full issue.