What should you weigh heavier: profitability or growth? All the entrepreneurs who have recently established their businesses, find it toughest to decide what to prioritise: grow and flourish their business or simply start making money.
Some think of prioritising growth while some incline more towards profitability. While both approaches are correct, each approach comes with its own merits and demerits. Let’s first try to understand the actual meaning of both terms and then try to analyse their pros and cons.
What is Growth?
Growth in business simply means a stage where the business reaches the point of expansion and seeks additional options to gain more profit. The expansion makes the company bigger, increases its market and ultimately helps to earn profits. Some indicators like the overall revenue, market share, number of employees, and turnover help in evaluating the growth.
When You Keep The Growth First
- Opens the door to obtaining follow-up funding from current shareholders of the company
- As the focus is on growth, the company attracts media attention
- Getting a necessary head-start on the market share from the competitors
Demerits of Putting Growth First
- May lead to a negative perception from the public if rigorous steps are required to earn profits
- May face the consequences of failing to meet big growth targets
- A constant fear of running out of funds
What is Profitability?
Profit refers to what is left of revenue after all the expenses related to the manufacture, production, and selling of products are deducted. It goes directly to the company’s owners or shareholders or is reinvested back into the company for different purposes. Profit is the primary goal as no business can survive without earning profit. Although financing can come as a solution here, it ultimately becomes a liability, not an asset.
When You Keep The Profits First
- An opportunity to hire more employees who can handle growing responsibilities within the firm.
- Allows to open more business locations, target new market segments and expand operations into foreign territories.
- Sustainability in bad market conditions
- Attract investors’ financing as a company that earns continual profits is seen as a good investment option
Demerits of Putting Profits First
- It may become more difficult to raise funds for the business if there isn’t sustainable growth
- Lack of adequate financing may result in making product development more difficult
Examples Of How Some Big Companies Recorded Their First Profit
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Intel
Founded by Robert Noyce and Gordon Moore in 1968, Intel is the brand behind inventing microprocessors. After securing US $5 million in capital, Intel launched dynamic random-access memory (DRAM) in 1970. DRAM was the first chip to store a significant amount of information. Three years after the launch, the company recorded its first profit.
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Facebook
In 2004, Mark Zuckerberg launched Facebook and within 24 hours, the social networking platform recorded 1200 sign-ups by Harvard students. By September 2005, all US High school students could sign up. Five years later, in 2009, Facebook earned its first profit.
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Alphabet
Google was founded in September 1998 and by the end of the year, the platform had an index of around 60 million pages. In the following year, Sergey Brin and Larry Page offered to sell the business to Excite CEO Geroge Bell but he refused to do so at even a reduced price. In 2000, Google began started selling advertisements and recorded its first profit by the end of 2001. Bids started at US$.05 per click.
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Ford
Henry Ford established the Ford Motor Company in June 1903. Backed by 12 investors, the company had spent almost all the investment of US$28,000. By October, the company recorded a profit of US$37,000.
Summing Up
To decide which one is the right path is like finding the answer of who came first: Chicken or egg. If you prioritise profits first, make sure that you have a well-thought plan for consistent growth. And if you plan to prioritise growth first, then you can’t afford to forget about the profits. Show your investors the game plan for earning real profit.
You also need to understand one thing very clearly, neither growth nor profitability can occur if not backed by a sound strategy. No matter which path you choose, at some point you will need both aspects to meet the objectives of the company.
