Is your business's profit real, or just a good one off?
By Andrew Isaacs, CIMA Member in Practice ·
Your profit is real when it comes from the everyday work of the business and would come again next year. If a big part of it leans on a one off, a lucky spell or interest on cash, that part will not repeat, and it pays to know which is which. AI Finance Partners strips the one off bits out first, so you can see what the business actually earns.
Why does a good year sometimes flatter the figures?
The best year a business ever has is not always the business's own doing. A single big job that will not come round again. A quiet spell where costs happened to fall. A busy patch across the whole trade that was never going to last. Even cash sitting in the bank earning interest while rates were high. Any of these can make a flat year look like a triumph, and the number at the bottom of the page still says profit, whether you earned it or not.
The trouble is that this kind of profit spends exactly like the real thing, right up until the day it is gone. It sits in the same place in the accounts, it gets counted the same way, and it quietly sets the tone for how confident you feel about hiring, spending and taking money out. Build next year on a number that was propped up by something that will not happen again, and you have planned to spend money that may never turn up.
Real profit is what your everyday work earns. That is the part you can build on.
How do you find your real profit?
It matters most the moment you compare one year with the last, or sit down to plan. The profit that counts is the profit your ordinary, everyday work throws off, the money you make from doing the thing you do. That is the part you control and the part you can build on. The lucky bits are lovely to have, but they are not something to bet a year on.
Taking those bits out is not complicated, and it changes the picture completely. You get to see the real engine of the business, and you can watch that number on its own from then on. This is the difference between an accountant who files the number and a finance partner who tells you what it means. If you have never seen that number on its own, it is usually the most useful hour you will spend all year. You can see how we work with small businesses, or get a written read of where you stand through the Outside View.
Andrew Isaacs is a CIMA Member in Practice and Practising Certificate Holder, and the founder of AI Finance Partners, the outsourced finance function for professional services firms turning over £500k to £5m across the South East. Legal cashiering is not part of what we do.