‘What needs to emerge, and in some circles is emerging, is what I call a mutual, or reciprocal, economy that focuses on the needs of both the individual and the collective…define a more integral and profitable reason for existence. By doing so, business leaders can avoid being on the defensive, fend off more government intervention, move to restore public trust and take significant steps toward enduring profitability.’
Dr Jeffrey Spahn 2003
Any organisation wants to be profitable and have growth. The question is – does one have to come at the expense of the other? Most start-ups and investors do not have unlimited funds and investors want to know – when is your company going to be profitable or at least self-sustaining (the P&L account is in balance)?
The five predicted crises of growth according to the model are:
Growth Phase: Direction – Crisis of Leadership
Informal communication starts to fail
Business now too big for leader to get involved in everything
Growth Phase: Delegation – Crisis of Autonomy
Business now has functional management
But founder / leader still struggling to let go
Growth Phase: Coordination – Crisis of Control
More formal management structures in place
But new layers of hierarchy needed to keep control
Growth Phase: Collaboration – Crisis of Red Tape
A dangerous growth in organisational bureaucracy
Slowing decision-making & missing external changes
Growth Phase: Alliances – Crisis of Growth
Growth slowing as business runs out of ideas
Alliances are sought (including new business owners)
Much of this debate revolves around where a company might be in its development. The general consideration – the need to choose between the two key drivers
The question when should a business focus on driving growth vs. profitability.
A company’s net profit is the revenue after all the expenses related to the manufacture, production, and selling of products are deducted. Profits are funds in the company’s bank account. It can go to the owners of a company or shareholders, or it is reinvested in the company. Profit is a key goal, but not the only one. Profit at any price is questionable. However, a company that does not have investors or financing, profit may be the organisation’s only source of funds – capital.
Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company’s profitability, both current and future, is critical in evaluating the company.
Growth for a business is essentially an expansion, making the company bigger, increasing its market, and ultimately making it more profitable. Measuring growth is possible by looking at some pertinent statistics, such as overall sales, the number of staff, market share, and turnover.
Determining and focusing on profitability at the beginning, or start-up, of a company, is essential. On the other hand, growth of market and sales is the means to achieving that initial profitability. Identifying growth opportunities should become the next important item on any company’s goal list after a company moves beyond the start-up phase.
But, understand, you need to pick one route or the other. You are either in a rapid growth phase with near term losses (or depressed profits) before the revenues show up. Or, you are in maximizing profit phase, which means lifting off the growth accelerator, and cutting back on your sales and marketing expenses.
For example, a 40% growth company may be operating at a break even, and a 10% growth company may be operating at a 20% profit margin. If you are committed to driving both, you really only have one option: a medium growth scenario that drives medium profits. Continuing the example above, this could be a 25% growth company driving a 10% profit margin (the midpoints of the above examples). But, to make it clear: using the above examples, it is mathematically impossible to get a 40% growth rate and a 20% profit margin at the same time, so don’t even waste your time trying.
What route do investors favour?
Since many of you desire to attract investment capital for your business, it is a fair question to ask which route investors prefer. The answer is: it depends what type of investor you are trying to attract. Most venture capital firms are perfectly fine sacrificing near term profitability in exchange for maximizing growth. Frankly, many venture investors who see a race to lock up market share as a first mover in your space, may want you incurring big losses in the near term to sign up as many customers as possible today, before a competitor does.
On the flip side, most private equity firms need some base level of profitability before they will invest, as they will most likely want to lever up the business with debt, to reduce their equity investment. And, debt service will require cash profitability to pay the interest expense on that debt. So, if you are trying to tee your company up for a sale to a private equity firm, that would be a good time to lift off of the growth accelerator and start driving some profits.
It is baffling when a business leader doesn’t truly understand what drives growth. Growth doesn’t just happen on its own. You need to invest in growth by increasing expenses around your sales and marketing investment. And, the minute you say expenses need to increase, that means profits only have one way to go: down! So, be smart, understand the basic numbers and pick which route is best for your business. But, to be clear, it is a fork in the road where you will need to decide between the two options. As trying to maximize both at the same time is a fool’s errand.
Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success.