Rethinking the P&L: a distinction between costs of maintaining the business and growing the business

Tom Lewis wrote a blog post on LinkedIn titled Are You a Cost or an Investment?

« Most management accounting analyses start with turnover, followed by a list of costs – the classic P&L approach… A lawyer sent me a bill so I put it in professional fees: so what? … As an accountant, I find this spectacularly unhelpful. »

« A more useful approach, I find, is to distinguish between costs and investments, i.e. the costs of running the business vs investments to grow the business. »

« Investments are the things you do to increase your margins; new product launches, brand building, that sort of thing. »

• « Managing costs as if they were investments leads to overpaying, wastefulness and inefficiency.
• Managing investments as if they were costs leads to underinvestment and failure to generate growth. »

« You need to understand this dichotomy within your own business in order to think about how your clients perceive you and whether that perception meets your business expectations.

• If your clients perceive you as a cost, they will look to manage that cost down over time.
• If your clients perceive you as an investment, they will look to maximize the return they make on the fees they pay you.  »

« Yet the traditional P&L, in your own business as well as in your clients’ businesses, encourages a focus on costs, how to classify them by type of supplier and therefore on efforts to reduce them. It may also lead you to reduce investments, in the mistaken belief that you are controlling costs.  »

This post followed a lengthy Twitter thread, somewhat contentious regarding whether marketing is a “cost” or an “investment.” Alastair Thompson astutely pointed out that marketing expenses could be separated into two categories: short-term sales activation and long-term brand building.  David Meikle insists that marketing/advertising is never a cost.

From a financial accounting standpoint, marketing will always be an expense. However, from a managerial accounting standpoint, the “costs to maintain the business” versus “investments to grow the business” is a useful distinction.