At some point in your entrepreneurial journey, you’ll come to a crossroads and face the daunting decision between focusing on sales growth or pursuing profitability. Both of these outcomes are highly valuable for a business. Owners and corporate executives strive to position their organizations for both maximum growth and healthy profitability. Unfortunately, it’s nearly impossible to attain both at the same time. In the end, it comes down to understanding the difference between the two and making an informed decision about when to shift your attention and resources to each one. If you’re approaching this juncture in the life cycle of your business, read on to uncover the fundamental characteristics of each path and learn how to discern the best option for your company.
Venture-backed companies are often under pressure from their investors to grow their top line as quickly as possible. As a result, they allocate a great deal of time and money into sales and marketing to expand the business and build a large base of clientele. They make the move to reinvest all of the money (and then some) from new customers into their sales and marketing efforts.
Why is this a valid strategic approach? In a number of cases, it enables the company to corner a particular market and gain the competitive advantage. If you’re able to reach customers ahead of your competition, you have a leg up on acquiring a strong base. In addition, some businesses derive value from the public prominence and attention that comes from being able to attain rapid growth.
However, there is a cost to pay for taking this avenue of entrepreneurship. First, it’s important to realize that you can only grow so fast before you hit a critical breaking point. If you grow more rapidly than you’re equipped to handle, you could endanger the business as a whole and find yourself in the midst of a failing enterprise.
It’s also vital to acknowledge that while investors are interested in seeing a pattern of growth, they are going to “look under the hood” and discover the reality surrounding that growth. If your financials don’t portray a picture of business health over the long-term, you may wind up in a precarious situation with compromised investment opportunities and a lack of financial support.
There’s no denying that entrepreneurs and business owners seek to be profitable. The reason you begin a business in the first place is to make money. In many cases, however, achieving true profitability comes at the cost of sales growth. Instead of reinvesting your profits into sales and marketing efforts, you allow them to pad your bottom line.
One of the greatest advantages of focusing on profitability is your ability to maintain financial health without relying as much (or at all) on outside monetary support. With a profitable company, you have the power to deliver your product or service, pay your bills and shell out salaries based largely on the income you’re obtaining rather than investment and loan options. In the end, the overall worth of the business may not be as financially valuable as a rapid-growth version, but you do own a bigger portion of it.
What a number of entrepreneurs fail to understand is that a “grow at all costs” approach to business ownership can cause a great deal of chaos and wastefulness. In a rapid-growth environment, you can become so focused on size that you end up hiring people you don’t necessarily need, that aren’t properly vetted, that don’t fit your ideal candidate criteria or that you’re unable to train properly. You may even begin to adopt a “quantity over quality” mindset that deteriorates the brand and puts customer loyalty at risk. And if you don’t manage your financials properly, you could come face-to-face with some serious cash flow problems that make it difficult to pay vendors, employees and other imminent costs.
On the other hand, if your business opts for a profitability-based platform, you don’t need to make these kinds of rash or hurried business decisions. By developing a sound business structure and honing your offerings instead of shelling out money for speedy scaling opportunities, you build a sturdier foundation. Of course, you also sacrifice market share and the competitive advantages of a rapid-growth model. But you take a safer approach to financial stability.
Which Is Better for Your Business?
The only way to choose between a profitability-focused or growth-minded business model is to understand your short- and long-term goals and seek support from experienced financial professionals. You’ll need to ask -- and garner answers to -- some of the following relevant questions, among others:
- What kind of market is the business operating in?
- Is it a highly competitive industry and important to acquire market share fast?
- Do you have sufficient capital to continue to invest in growth or do you need to stop burning cash and get to break-even?
- Are you relying on equity investors and/or loans to finance the company?
- Are you planning to work with venture capitalists or a private equity firm?
- Is your business a B2C or B2B enterprise?
- Do you plan to sell the company at some point, and how quickly are you planning to do so?
All of these factors impact the route your business takes. It’s also true that the answers may change over time, which means your business model may require a shift to one approach or the other, depending on your financing needs, market realities and business objectives. Whichever path you take, be sure to research and consider your options thoroughly.
For expert advice on making sound decisions for your business, talk to a strategic financial professional.