How to Manage Growth versus Profit
Entrepreneurs go into business for various reasons, and the two most common ones are either to make a lot of money from profits or to make the company grow. Some are more focused on making their business grow and expand, while others are more intent on earning profits. There are those, however, that are of the belief that the two goals can actually co-exist; it’s just a matter of managing them together, at the same time.
Before we can get to discussing how such a thing is possible, however, it would be best to understand Growth and Profitability first. In this article, I will start with explaining 1) growth versus profitability, and continue then with 2) how to manage growth versus profit.
GROWTH VERSUS PROFITABILITY
As a business owner, what would you prefer? A profitable business, or a growing business? If you compare two businesses, will you immediately conclude that the one with a higher profit margin is the better, or more successful, one? Will you automatically assume that the more profitable business is the one that is better managed?
Things are not clear-cut like that.
There are two mindsets currently at play here.
The Profitability Mindset
Profitability is, obviously, the ability of a business to earn a profit, or to have something left after all costs have been deducted from the revenues. The key document that will take center stage here, therefore, is the Income Statement, or the Profit and Loss Statement.
The profitability mindset clearly has one direction: to maximize profits. Clearly, the downside of this mindset is that it usually ignores the long-term consequences of business decisions that usually revolve on how to increase revenues and lower costs
Businesses that value profitability more than growth are more inclined to have business practices geared towards making profit.
Focusing on more profitable items
This is most applicable to businesses with a diverse product or service line. There is a need to identify the product lines or product mixes that yield higher revenues, and focus on producing and selling more of them. They generate more money, so the business will naturally have to concentrate more of its sales effort on them. This is also referred to as “up-selling”, or selling the premium products that contribute the most amount to the profit that you are getting from sales.
The following strategies are often employed by businesses in order to increase their sales revenues:
- Reassessing your costing and pricing strategy. Maybe you are pricing your products or services too low. It is advised that you perform a regular review of your pricing, taking into account changes in the marketplace.
- Apply diversification. Develop new product lines or offer new services that the customers are clamoring for. This can also mean that company should consider “cross-selling”, or offering complementary products alongside their main products. For example, instead of just selling tooth paste, you can also sell tooth brush as a complementary product.
- Find new customers through market research and marketing. This also means you should find out who your best customers are; in this context, the best customers are those that are most likely to develop loyalty to your products. Many businesses claim that profitability has higher chances of increasing if you focus on your most profitable customers, even if it means that you have to let the less profitable customers go.
- Expand the market you are currently in. When done right, moving into new markets can boost your business’ profitability.
- Increasing staff productivity. Boost the morale of your workforce in order to encourage them to increase their productivity. This is one way to guarantee that your products and services remain at a high quality.
Manage your costs
There are several ways to go about decreasing and managing costs.
- Managing inventory through controlling stocks. Are you making effective use of your working capital? Reassess your inventory system to see if it is working to your advantage or not.
- Negotiating for lower or discounted prices with suppliers in order to decrease direct costs. Check if you are getting the best deal from suppliers. You also have to regularly review your supplier base, since there may be new suppliers that offer the same – or better – quality, at cheaper prices.
- Putting restrictions on manpower hiring to decrease indirect costs. In short, hire only who you need. If you notice some workers having idle time, look for a way to utilize their skills that will still be contributory to your operations.
- Applying saving or minimizing measures to decrease overhead costs, such as in utilities and power consumption. This also entails evaluating your operating efficiency. Are you getting the most of your space? If there are unused space, are they idle, or could you do something in order to earn from it? The same is true for unused services; are you spending on unused phone lines?
- Streamline your processes in order to increase efficiency. Perhaps you can even shorten the time it takes to complete one process by combining them or cutting out those that are redundant.
The Growth Mindset
First, we have to define growth. In general terms, it is an increase or development in size, amount, degree, value, or level. In business terms, it refers to the increase in the ability of a business, or an economy as a whole, to produce goods and services.
Business owners that have a growth objective look towards revenue and profitability as the primary growth factors; meaning, they look at their revenue and profits in order to ascertain whether they are achieving business growth or not.
However, beyond profits and revenues, there are other factors that also indicate business growth, and we will look at some of them.
A business should be able to grow its experience and expertise, and these can be seen in its ability to expand its line of products and services. Another would be in how it is able to expand its target market, which is usually accomplished by creating or opening new channels of distribution.
The very volatile nature of the market entails business to be able to change or evolve with it. A business that is not able to keep up with the changes in the market cannot be expected to grow since it will essentially be stuck in a rut.
Therefore, exercising flexibility is very important. The businesses should exhibit a willingness to adapt to the changes. It should be open to trying new things.
Being narrow-minded will get you nowhere, and this also applies in business. The business should practice having a broad perspective so it won’t box itself in a corner. This is essentially more about the business owner and the internal workings of the business, rather than external factors such as the customers and the competitors.
There are several ways to ensure that you keep your business perspectives wide: They include attending seminars and actively participating in workshops; acquiring new learning by attending classes or enrolling in formal courses; getting face-time or personal interaction by joining groups of like-minded individuals as well as groups that are all about collaboration and sharing strategies.
Many businesses seem to get by on reputation alone, and there is a lot of truth into this. If you look past the numbers – the sales, the profits, the assets, the net worth – and the only thing that a business will have going on for it is its reputation, or how the market perceives it. Therefore, the business must clearly display an ability to create a solution for the customers or, failing that, to lead them to a solution.
When a business sells a new product, customers have zero knowledge about it. Customers will then decide whether or not to try the new product based on what they have heard or read about the business. In short, clients and customers will buy products or avail of services based on a company’s reputation. In the long term, clients and customers will continue to buy products or be loyal in availing the services of a company based on a combination of user experience, quality of the offering, and the reputation of the business. These go hand in hand.
How does a business grow its reputation? Of course, the first thing it has to do is to ensure that it offers high-quality products and services. Other activities include the following:
- Implementing effective marketing campaigns highlighting the products or services offered by the business. These encompass making your business’ presence felt in various media, such as print and broadcast.
- Being affiliated with accredited and recognized business associations, groups, and similar bodies. An example would be how many business companies obtain recognition from BBB, or the Better Business Bureau, a non-profit organization that focuses on advancing trust in the marketplace.
- Staying in touch with your customers or clients by conducting surveys and other information drives or campaigns.
Just because your business successfully managed to increase its revenue and profits over the years does not automatically mean that your business is growing. There are also other factors at play, and you should pay attention to them if you hope to be able to claim that you have, indeed, achieved business growth.
The growth mindset is more focused on generating consistently high levels of earnings, and they are more inclined to reinvest their earnings in order to continue expansion plans for the business. Of course, you will find this mindset to be followed more by startups or relatively new companies.
A Comparison Between the Growth and Profitability Mindset
From the discussion above, we could easily surmise that the profitability mindset appears to be more short-term oriented than the growth mindset. For lack of a better word, the former seems to be the shallower perspective. A business owner can aim to make profits without giving much thought to the growth of his business, but a growth-oriented business owner cannot hope to have his company growing without taking note of how much revenues or profits it is making.
From the point of view of an investor, growth will outweigh profitability every time. True, they will take note of the final figures on the income statement, but they will put more weight on the growth factors exhibited by the business. For them, a business that exhibits growth faster or in greater leaps is more likely to provide them better returns on their investments in the future. Even in this scenario, they are looking at the long term. Thus, more than the income statement, they will scrutinize the cash flow statement more closely, placing more importance on the business being “cash flow positive”.
HOW TO MANAGE GROWTH VERSUS PROFIT
Believe it or not, growth and profit have a healthy relationship. It is a fact that, in order to make a business grow faster, you also have to make it earn profit faster. The more profitable a business is, the greater are its chances of growing.
But interspersed with that healthy tension is a bit of trade-off. Some businesses, in order to make their profits look good, will have to hold back on some of their earnings and not invest them for growth purposes. Or, in contrast, in order to focus on achieving growth objectives, the business will invest its dollars, even if the profits will end up way down there. Fortunately, this is a trade-off that is actually manageable. Growth companies can still actually make a profit.
So how does one manage growth against profit, striking a balance that will actually pave the way for the coexistence of growth and profitability?
Focus on customers’ needs instead of competing head-on.
Grow customer benefit in order to grow your business. In simpler terms, give more importance on customer benefit, or the reward that the customers receive from choosing the product or service that your business offers. This is a strategy employed by big names such as IKEA, Home Depot, and Dell. Instead of going up against competitors, they worked on fulfilling what their customers need and want.
It is simple, really. If a customer is greatly satisfied with the benefits derived from using a product or service, they will be more willing to spend money on your offerings, adding to your revenue and, ultimately, to your profit margin.
To this end, it is important to get to know your customers. Create a database that contains more than adequate information on your customers. But do not just focus on your existing customers. You should also be able to draw information on your competitors’ customers, as well as those that are neither your, nor your competitors’, customers.
Come up with a value strategy.
Create value for your customers. Deliver perceived high-quality offerings, which means your products or services must be delivered at a competitive price and within the shortest time possible. You should also make sure to deliver them with excellent customer support or service. After all, the best way to establish high customer satisfaction and build a loyal customer base is to create and deliver value.
This is why you should know who your customers are. If you understand them, you know what they need or want, and you will be able to produce exactly what they need or want.
We have already established that customers will be more willing to spend money on products or services that are deeply rooted in customer benefit. If you provide them high quality or great value, then they are also likely to agree to pay higher prices. They will also be more than happy to recommend your products and services to others, and we are all aware that one of the best forms of advertising is through word-of-mouth.
There is one other positive effect to this: you will be able to cut down on your marketing or advertising costs. And you know what lower costs mean: higher profit margin.
Grow the market.
Focusing on customer benefit will also lead to you growing the market, not just your market share. How is this possible?
By learning what your customers need, you will immediately get to work to address those needs and meet their demand. As a result, you are bound to step out of your comfort zone, so that you will now be catering to other parts of the market, not just that specific share of the market that you were originally catering to.
For example, a company that originally sells toothpaste and breath fresheners will now venture into the production and distribution of products for teeth whitening and cavity treatment. As a result, the business will also expand to those markets, instead of just the toothpaste and breath freshener users, AND they will also increase their profits.
Invest to earn profits.
Growth usually means reinvesting what resources you have. In order to earn profit from it, you have to make sure to invest wisely. If the business decides to invest, it should choose its investments wisely. Pick those that will give them a healthy return, whether the investment is short-term or long-term.
Profitability and growth need not be independent of each other. More and more businesses are gaining enlightenment with respect to profitable growth. It may take a while for all businesses to get past their narrower mindset and get on the bandwagon, but with enough motivation, drive and commitment, they will get there eventually.