Do you know how much profit your company made last month?
Or last year?
If you can immediately name the figure, congratulations. Most business owners can’t.
But here’s something that may surprise you.
That profit figure isn’t quite as objective as you might think.
In fact, there are several different ways to calculate profit. Some are clearly wrong. Others are perfectly legitimate – but can still produce very different answers.
Let me give you an example.
Many of our clients deliver projects that span several months.
Let’s say you win a project worth £10,000 in January, but it will take six months to complete.
The client pays the full amount upfront.
Should you recognise the entire £10,000 as revenue in January?
Not really.
Yes, you’ve received the money. But you haven’t delivered most of the work yet. In fact, many of the costs associated with that project still lie ahead.
Recognising all £10,000 immediately would create an artificial spike in revenue and profit that doesn’t reflect what’s actually happening in the business.
A better approach is to recognise the income as the work is delivered.
But even then, there are choices to make.
You could spread the £10,000 evenly across six months.
Or you could recognise it based on the proportion of work completed each month.
Both approaches are acceptable. Both can be justified.
But they will produce different monthly profit figures.
And those figures influence the decisions you make about pricing, hiring, investment, cash flow and growth.
This is why accounting isn’t simply about recording transactions.
It’s about presenting a fair picture of what’s really happening in a business.
The problem is that many bookkeepers don’t make these adjustments at all. And many accountants only make them once a year when preparing statutory accounts.
As a result, the monthly accounts business owners rely on can often be misleading.
That’s one of the reasons we place so much emphasis on understanding our clients’ businesses in detail.
We don’t just look at the numbers. We talk to our clients about how projects are delivered, when costs are incurred, how work progresses and what is actually happening operationally.
That allows us to make informed judgments about issues such as work in progress, revenue recognition and project profitability.
The result is management information that is far more meaningful – and far more useful for decision-making.
Because ultimately, the numbers in your P&L are only as good as the information and assumptions that sit behind them.
If you’re relying on your accounts to make important business decisions, it’s worth asking whether the numbers you’re looking at truly reflect what’s happening in your business.
At Insight Associates, we work closely with ambitious businesses turning over £1m+ to ensure they have accurate, meaningful financial information they can actually use to improve profitability, manage cash flow and support growth.
If you’d like to explore how we could help your business, simply email garry@insightassociates.co.uk or call us on 01279 647 447 for a no-obligation conversation with myself or one of our specialists.
Garry
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