Profitability vs. Growth in business
While we all agree that no business can survive without growth or profits, the question remains: should a business focus on one goal before another?
Traditional businesses almost always put profit first, but younger companies tend to build toward growth first, then worry about making money later.
Both approaches are correct and rational, but each comes with its bag of pros and cons.
Growth first
Business growth means that a company is expanding so that it can become bigger in terms of size, markets, product offerings (or services), revenue and profits.
Pros:
- Making your company attractive to prospective investors
- Obtaining additional funding from current shareholders
- Attracting media coverage
- Racing to capture market share from the competition
Cons:
- Failure to anticipate a probable slowdown in traction
- Burn rates for capital are high
- The disastrous consequences of failing to meet big growth goals.
- A company’s public image will suffer if drastic steps are required to become profitable.
- You are never more than one round of financing away from closing down your company
Profits first
Profit is defined as revenue after deducting all operational expenditures of a company related to manufacturing, production, running costs, and the sale of items. Profitability establishes a company’s runway in terms of a crisis or adversity.
Pros:
- If your business is profitable, you are more likely to attract investment and acquisition offers.
- In a fundraising round or a sale, you have bargaining and negotiating leverage
- Offers protection against market downturns.
- You make your own luck.
Cons:
- It may be harder to attract investors if there is no initial growth.
- Faced with rapidly shifting industrial forces (think Uber and Airbnb)
- A lack of adequate financing may make product development more difficult.
- All in all, profitability without a growth plan or growth plan without profitability will cause a company to annihilate.
Conclusion
Your choice of growth or profitability will depend on many factors, but it’s crucial to choose one and focus your efforts there.
If you are starting out, it is more important for you to get your business up and running before putting much emphasis on growth.
However, once you have a foothold in the industry that you’re operating in, it can become much more important to focus on growth and your company’s future.
