When business owners think about tax accounting, a feeling of dread often overcomes them. Most small to medium sized companies deal on a “call me if you have any questions” basis with their tax accountants, but shouldn’t there be a way that is more customized? One that takes into account the priorities of the company, and optimizes accordingly?
Today I’m talking with Dan Nicholson, founder and owner of Nth Degree, an accounting firm that services small to mid market businesses. Nth Degree uses a process called cashflow engineering, plus a set of principles to help companies optimize and gain power over their finances.
Dan was always scheming up business ideas as a kid, intent on becoming an entrepreneur. However, his path after earning an accounting & information systems degree didn’t initially lead him in that direction. He set out on an 8 year path that included a fellowship where he wrote accounting standards related to derivatives, and worked for a global firm in the derivatives space. Soon, he realized the opportunity to do something different in the CPA firm space, which led to him starting Nth Degree CPAs.
What is Nth Degree’s focus? (6:15)
- 42,000 firms in US: most firms are 1-2 person shops OR large firms
- Most small to medium sized companies are working with the smaller shops
- Tax accounting is the most hated task by business owners
- Normally these businesses don’t have proactive engagement with the CPA firm
What is the reason business owners hate tax accounting? (7:25)
- Financial anxiety = financial uncertainty x financial powerlessness
- Businesses have lots of financial anxiety… “Will I run out of money?” plus a lack of power over their finances
- Revert to “I just need more sales or better customers” instead of digging into the financials
How do you ease a business’s uncertainty that the revenue will stop? (9:56)
- Uses a process called cashflow engineering: compile, analyze, strategize and execute
- Increase power over finances (psychology piece)
- Many decisions are preferences rather than facts; uses principles for decision making
- Have to get a handle over cash flow by engineering it to get outcomes we want
Where does someone get this type of knowledge and education? (13:41)
- Formal business education focuses on preparing students to work for Fortune 500 companies
- Challenge is that small businesses have less resources so they have to optimize
- What are the outcomes they want?
- What is most efficient path, knowing you can’t have it all today
- Small companies use a different toolkit, because they are optimizing not maximizing
Give an example of optimization (16:28)
- List the things client wants, and rank order them
- Make people vote with their money to determine their real priorities
- Emotional buying (or retaining) an asset doesn’t always make the most sense
“What we are trying to do over time is grow our cash flow while reducing our risk.”
Business owners often discount the cognitive burden around decisions. By raising all the fixed costs in their business without growing their committed revenue, they now have a burden of thinking about “Where’s the next dollar going to come from?” and “I need each investment to pay off”, and that takes us out of consistently executing in a way that we would if we didn’t have this cognitive load.
What is the one thing you wish you would have known in relation to your career path and starting your business? (37:34)
- Greatest strengths and weaknesses would never be more apparent
- Needed to hire a coach after he kept making some of the same mistakes over and over
- Learn to play your game and your style of play; your unique business style
- You get to choose how you show up in your business, and shouldn’t be conforming to other defined sets of rules that don’t serve you well
- Finance and wealth are strategies; the accounting is just the output of business decisions
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