We will make a loss but it’s because our business is growing, should I be alarmed?

So, will you finish this financial year making a profit? Will you turn a loss because you are “investing in the future”? Or did you have a bad year?

Depending on which conversation you are having the same bottom-line could be explained as all three. With a bit of creative accounting most businesses can play around with their numbers to tell pretty much any (unaudited) story they want. But when it comes down to how you review your results this year you will want to tell yourself the unexpurgated truth.

It’s common for businesses that are growing rapidly to make all sorts of investments for the future which, under usual accounting rules, will hit the profit and loss account in the year in which it is incurred, but for which the benefit will only be realised in future years.

A common example of this is when a business makes a senior hire in the last few months of the year. A company that hires a new head of marketing may find themselves paying 25% of his annual salary this financial year but seeing no corresponding increase in revenue until the next financial year.

Another example is when a company moves into new premises large enough to accommodate an anticipated increase in employee numbers, but which is currently looking a bit empty. The rental cost hits this year’s profit and loss account even though the hires won’t come on board for a few months.

Accountants and lawyers fees are another source of costs expensed in the current financial year where the benefit is not realised until future years. Think about the costs incurred setting up an employee share scheme. The scheme put in place this year to improve employee retention, will reap its benefits – employees having a longer tenure with the company – gradually over many future years.

All these little bits and pieces when jotted up in one’s head can genuinely lead you to believe that if it were not for the fact that you making all these investments for the future, you would be presiding over a business that was making a healthy profit.

But boy can we mislead ourselves over this by allowing vague mental arithmetic to work in our favour.

So my suggestion this week is that you consider doing a quick “normalised profit and loss account”.

To create a normalised profit and loss you simple take the profit and loss as produced by your finance department and adjust it for expenses, like the ones above, that are genuine costs of growing. (I suggest you list them out and do a simple calculation to quantify each one.)

Once you have completed your normalised profit and loss you can recalculate your result for the year. Is it still a loss? If so I suggest that it’s time you stop using “growth” as an alibi for a poor year and refocus on your business.

If, of course, if the normalised profit and loss reflects a profit, that’s marvellous. With one proviso. It doesn’t change the fact that investing in growth sucks up cash. But hey, that’s an article for another day.

To read more Profitable Growth expert advice, click here.

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business” and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).

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