A business owner may ask, “Which is more important, profits or growth?” Clearly, both are critical. Still, noted author and management consultant Peter Drucker said pointedly, “Profitability is the sovereign criterion of the enterprise.” And Hendrith Vanlon Smith, Jr., CEO of Mayflower-Plymouth added, “If a business is not profitable, It’s worthless.”
While profits don’t necessarily guarantee growth, no business can succeed in the long run if the business is stagnant.
Why Profitability is Important
Continuing to earn a profit is important because it means that a company can pay its ongoing bills, keep its human resources employed, secure financing, attract investors and grow its business.
Why Growth is Important
Growth is important because stagnant sales can’t support increasing expenses. Growth spurs innovation, enables a business to meet changing consumer needs, makes a company more attractive to strong human talent, makes a company more appealing to investors, and enables a company to more easily secure funding.
Profit or Growth?
There is no real dividing line between profit or growth. Both are required and both go hand-in-hand. A company can have (at least for a short time) a high growth rate and low profitability because of the factors involved in profitability including costs, pricing, and competition. A company that is growing quickly may not be able to maintain a constant rate of profits if it doesn’t carefully control its costs. A company that is growing quickly may be able to enhance its profitability by achieving new economies of scale. A company that is growing slowly may be less profitable as it deals with increasing competition or increasing costs.
Growth allows businesses to reach new markets, attract new customers, and improve their operational scale. Profitability allows businesses to reinvest in themselves, improve their operations, and continue to grow.
There are risks of growing too fast. Fast growth can strain a company’s resources and it can lead to problems with cash flow. It can also divert funds from the important benefits of product development and other research and development efforts.
Profit or Growth? The Profitable Growth Pursuit
Pursuing profits or growth is not a yes/no decision. Both must be pursued as in “profitable growth.” Here’s what to know. First, revenues are not the same as profits. It is important to increase revenues, but it is equally important to manage operating and production costs. If costs to produce products or operate your business rise faster than revenues, you will experience a profitability decline. And second, it is important to identify which customers/customer categories are most profitable, and which products are most profitable. If you don’t manage your sales portfolio, you could be selling more low-margin items at the expense of selling more higher-margin items.
You can achieve profitable growth by increasing your market share, introducing new products or services, opening new locations, entering new territories, identifying new market niches, and merging with or acquiring another organization.
Profitable growth can be achieved as you critically review your business against your established goals and business plan, pay close attention to accounting metrics and processes, rigorously review your financial documents, secure the financing that you need to operate and grow, create strong organizational alignment, and utilize systems, processes, and technology to optimize your performance.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO. We provide professional accounting and financial assistance that businesses rely on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.