It feels good to celebrate a bumper year, when the number at the bottom of your annual accounts is higher than last year. But is profit enough and what does it really mean?
Does it show how your business is progressing – or is it just an arithmetic exercise?
Maximising short-term profits is rarely an effective business objective. Instead, an owner is more likely to meet their personal goals and aspirations by setting a medium or longer-term strategy.
This may mean, of course, that profit is not maximised in the short-term. Profits are affected by short-term measures such as cash maximisation, which can result in a period of price cutting to reduce stock levels; or profits may be restricted due to investment in additional plant, or the recruitment and development of people.
Numbers’ true meaning
There are many reasons why profits fluctuate. The important thing is to be aware of why your profits are in motion and what the long-term effect is.
After all, the numbers simply measure progress towards the achievement of your strategic objectives, and are rarely important on their own.
Accountants wouldn’t normally say that numbers are unimportant; but then we at Haines Watts are not normal accountants. We’re more interested in working with our clients to help them understand their businesses and achieve their goals. Sometimes that means more than just numbers.