Expansion & Improvement
According to conventional business wisdom, ‘turnover is vanity, profit is sanity, cash is king’, but you might not immediately remember this given the last decade of business success stories. From Uber to Amazon, many of the giants that have been held up as examples of innovation and expansion have done so explicitly at the expense of profitability (and while burning huge piles of cash). Amazon, for example, didn’t turn an annual profit until 2003, nine years after it was founded. The mission for many businesses, especially those with deep-pocketed investors in their corner, has been growth.
While every business is different, growth and profitability are once again front of mind for many, with tightened economic conditions closing in. Businesses that have been aggressively chasing growth at all costs may now find themselves wishing to trim the sails a little.
Hassan Behcet explores the roles that growth and profit play in planning and running a business, as well as how owner-managers can balance the two to get the best result.
Growth and profit as a strategy
Growth and profit are a balancing act – closely linked and often co-dependent. However, recent boom cycles and favourable credit conditions have created an environment where growth could become the primary metric for a business.
While profitability is usually the goal for those trying to set up a lifestyle business that can sustain them and their families in the long term, the growth-focused view looks to accrue income not via a slow and steady salary but via a big bang event such as a public market listing or acquisition.
The bleed of this narrative into the public consciousness has created an image of growth being the ultimate goal for a business. The truth, however, is more nuanced.
There are in fact scenarios where growth makes sense as a primary strategy. The first is where profitability is not an issue, such as where your business has significant external funding that can make up for the shortfall in operating revenue by continually topping up the business’s reserves as needed.
The second is when profitability is limited, by either the business model or the market. A classic example from the food industry, is fast food and casual dining. In these establishments, spend per head is relatively low, meaning that margins are tight and profitability relatively limited. No amount of efficiency is going to lower the cost of your raw materials (past a certain level) so your only option to increase revenue is to do more of the same on a larger scale.
You can contrast this with the upper end of the dining spectrum, with fine dining restaurants that have to deal with a larger, more expensive workforce, higher cost ingredients and a fickle customer base. In these establishments, profitability is a key focus, because if it drops, the business may well be in trouble. These businesses also have more options to increase spend, say by offering special menus, holding events or upselling costly add-ons, like wine and cocktails.
Measuring growth and profit
Whichever your strategy, the key is that you’re able to track, quantify and improve on your processes to achieve your goals. And here, growth certainly has an easier time of it. Measuring your growth focuses primarily on measuring your top line revenue, be that revenue generated, customers served or units sold.
Profit is much more time consuming to track. It requires looking not only at your top line, but also all your overheads, as well as further down the line to tax, billing and investment. Measuring profitability is still a key task for responsible owner-managers though for multiple reasons.
Firstly, if you want to improve the income you take home from your business - the profit - then you need to be able to track what you’re generating to find ways to do it better. This could be by cutting costs, managing billing more effectively or launching new products.
The second reason is existential – just because you’re growing and generating revenue, it doesn’t necessarily follow that you’re making a profit. Businesses that aggressively pursue growth tend to spend a lot – on marketing, sales, people – and if you don’t have external funding to back you up, your growth could just be killing your business.
As some businesses may be finding now, growth can be easier to prioritise when credit is easier to access and times are booming, but once lending conditions tighten, interests rates rise (servicing debt is a key overhead) and business slows, getting back to profitable conditions could require some tough decisions, such as shrinking your team.
Finding the balance
For the majority of businesses, balancing growth and profit will be a constant cycle throughout the company’s lifetime. Sometimes conditions will favour one, other times the other. In the early days of a company, growth is the natural goal. Most new businesses will require a certain scale in order to be profitable and cover their overheads. In addition, you’ll often need a certain level of turnover to attract investment, protect your market share or even offer the services you want to do.
With size comes more avenues for profitability, whether that’s taking advantage of economies of scale, attracting more skilled and profitable staff or investing in tools that make you more efficient. The key is making sure you have the right information, support and context to make the right decisions at the right time for your business, whether that’s grasping an opportunity or avoiding a risk, which is where the right support can make all the difference.
How we can help
At Haines Watts, we know the small business landscape is always changing. That’s why we work with our customers to build reliable reporting structures, help them understand the numbers and guide them through making the best decisions for their future.
With our mix of financial technology solutions and industry expertise, we can help you stay in control of your business, whether you’re looking to scale or aiming for profit.
Get in touch with one of our team to find out how we can help you find the balance for your business.