I talk with my clients a lot about improving their profits, and one common response is that profits are only low because they’re investing in growth, but that is usually only an assumption. In this post, I explain why that assumption is bad, and a simple method to provide proof.
Obscuring your ‘real’ profit
“Our profit is just low because we’ve been investing in growth.”
This could be a fair statement, but do you have proof or are you just avoiding looking critically at your numbers?
It could be another issue that is affecting your profit, and if you blame low profit on growth then you will never address the real issue.
How to prove it
What we need is an easy method to make sure that your low profits really are due to growth expenses.
Here’s what we’ll do: add a separate section to your profit & loss statement (income statement) report in your accounting software.
All the growth expenses will be listed separately to your other expenses, so you will be able to see at a glance what your profit is before growth expenses.
In Xero, use the grouping feature (step-by-step instructions). In Quickbooks Online (AU, US) and MYOB, your growth expenses should be set as “Other Expenses” in your chart of accounts, not “Expenses”.
More about monitoring growth expenses
Now that you can see your growth expenses separately, you can calculate the return on investment (ROI), i.e. growth expenses divided by results (usually sales), expressed as a percentage. You can use this number to decide whether the growth initiative is/was more successful than other growth initiatives or other options to deploy those funds.
Also, make sure that your growth initiatives actually come to fruition. They shouldn’t limp along for months, draining your profit and not delivering an improved result. Consider whether you can set aside a block of time to sprint through the last steps required. Or perhaps an influx of cash is needed to wrap up the growth initiative quickly; you will need to balance the effect this has on its ROI against getting the results sooner.