Businesses should always have their eye toward profitability. Without the ability to earn revenue, a company will not last very long. Being able to turn a profit is vital for sustainability, and it makes your business more attractive to investors or potential buyers down the road.
Growth is sometimes mistaken as the same concept as profitability. However, the two ideas are slightly different. You can still make a profit without growing, and you can continue to grow without making a profit. Finding the right balance of these two ideas will help your business thrive well into the future. So, what is the difference? Why does it matter? How can you achieve both profitability and growth?
Defining Profitability
Most business owners should know the basic definition of “profit.” It is the amount of funds that your company generates after deducting all of your expenses that are related to producing or selling your product or service. These expenses include both direct costs and indirect costs, like overhead expenses that are not directly tied to a product or service.
Making a profit should be one of the major goals of any business. Many business owners and experts will tell you that is your business is not making a profit, then you are doing something wrong—and your company will not last long. Operating at a “break even” or loss generally is not sustainable over the long run. That means profit is absolutely vital to the vitality of your company.
Growing Your Business
Growing your business is often considered the “next step” in ensuring that your company has a bright future. While operating at the same level can be profitable, there is often a point where profits decrease or are not sustainable. When your company hits that point, the need for growth is triggered.
Some will argue that you cannot grow your business without first being profitable. Growth is the logical next step as your company becomes more mature and moves out of the “startup” phase.
Examples of business growth include things like:
· Expanding your target end-user or consumer
· Increasing the variety of products or services that you offer
· Acquiring larger facilities
· Increasing y our staff or employees
· Making moves that will allow you to create more products or provide more services (such as getting a larger location or more efficient equipment)
Growth will mean a variety of different changes within your business, and it will vary based on the type of company that you operate.
The Difference Between Profitability and Growth
Making a profit is required if your business wants to survive. However, growth is necessary if you wish to have long-term vitality. Your customer’s needs and wants will change over time. If your company cannot adjust to these changes (growth), then you will see a decrease in demand (profitability). The two concepts are mutually dependent on one another, but they are not the same.
You must make an investment to grow in most circumstances. That investment decreases your bottom line, at least initially. This interesting relationship between these concepts means that while the two ideas are intertwined, they actually operate in opposition to one another.
Can You Grow and Be Profitable at the Same Time? Many business experts will also tell you that you cannot achieve both profitability and growth at the same time. You need to spend money to grow, which often means that you cannot be profitable during periods of growth. In fact, the up-front costs to trigger growth are often very substantial. You may need to invest funds now that you will only see returned several years down the road.
Despite some arguments to the contrary, you can be profitable and grow at the same time. For example, you can take a portion of your profits and put it into research and development for a new product. You do not actually have to invest every last dime into growth to make it work.
The trade-off of putting less than everything into the company is that growth does not happen as quickly when you cannot invest as much into it. The result is “medium” profits and “medium” growth. This scenario is not necessarily bad, but it does not maximize either concept—dampening both profits and growth from their full potential.
Where to Focus: Profitability or Growth?
If you are a startup company, your initial focus has to be on profitability. This is especially important for small businesses that are owned by one or two people, and this is their only source of income. Many small business owners only take a salary if their company has the revenue to support it. The reality is that you need to be able to make a profit so you can put food on the table.
Once you are making a regular profit, then you can look toward growth options. At that point, you can decide whether you want to go “all in” toward growth or take a less risky, medium-level approach to growing your business. The decision you make will depend on your goals for the business and how long you want to remain a part of the company.
For example, if you are considering selling your company, your approach may be impacted by that type of goal. Certain types of investors, for example, may look more favorably on growth than simple profitability when they are considering investing or purchasing a company.
Timing for growth should also be based on the market, consumer habits, and other related factors. If consumers are not purchasing as much for a period, you may need the funds that you would have invested in growth to cover general expenses, for instance. Thinking through all of these fact scenarios is an essential part of ensuring your business thrives for years to come.
