What’s Your “Big Bath”?

In business, there is a practice known as Big Bath accounting.

The way the practice works is that when a company is having a bad year financially, it will opt to do everything it can to make it look as bad as possible. This may involve delaying revenue for the current year until the following year or incurring expenses in the current year that could have been delayed until the following year.

The combination of postponing revenue and advancing expenses will make the company’s current year profits even lower than they were projected to be. A couple of reasons have been suggested as to why companies do this.

One thought is that if it is going to be a bad year anyway, you might as well make it a doozy (not a formal accounting term!). That way, it will be easier to make the following year look even better.

Another related reason why such decisions may be made has to do with executive bonuses. Bonuses are typically paid if the company hits certain profit goals, but there is rarely a penalty if there is a loss.  So if there is going to be a loss, and the executive’s compensation is not affected by the size of that loss, there is an incentive to increase the size of the company’s loss, so that it will be easier to show a profit the following year. For example, rather than having two consecutive years of small losses, and thus no bonus either year, the company take a Big Bath and have a large loss the current year, but then a better chance of profit the following year, making the executive eligible for a bonus.

Anyway, for those of you who have not yet fallen asleep while reading to this point, this is not meant to be a post about accounting, but about our own Big Baths.

I know it happens to me. Exercise is the cornerstone of my daily routine, but if I miss a day, that’s also the day I’ll tend to care less about what I eat, thinking that the day is a waste anyway. But when I do exercise, I am motivated to behave in a healthy way the rest of the day.

Or how about after a bad day at work; many of us just want to come home and veg out in front of the TV with some chips and beer.

Or what if you’re not feeling too well and decide to stay home from work. Do you use such a day to lay in bed and eat Oreos?

I’ve seen students struggling with one part of a test, but then at some point just give up on the entire test (hoping that I will drop their lowest grade!).

What all of these examples have in common is that a relatively minor failure or difficulty is escalated into a much bigger problem by our response to such failures or difficulties.

Like a business, we take a small loss and make it an even bigger one.

However, a Big Bath for a business is usually done for strategic purposes and the business fully intends that the following year will be a good one.

But a personal Big Bath carries with it the danger of setting a precedent, of putting us on a slippery slope.

It’s a lot easier for a company to recover from padding this year’s expense accounts than it is for us to recover from eating a half gallon of Rocky Road ice cream while watching reruns of the Seinfeld Show.

So by all means continue to take baths, just don’t make it a Big Bath.