Profitability or Growth: What is More Important to a Business

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Monday, January 03, 2022 / 03:00PM /Sponsored post by Derek Edison / Header Image Credit: Pexels

 

 

The number of registered small businesses has increased steadily since 2010. Yet, there are many factors to consider when opening a new business online or offline. One of the primary factors to consider is what's most important to the business.

 

While every business owner aims to make a profit, there is also a question of growth. In an ideal situation, a business owner defines the end goal to determine their priority: business growth or profitability. Does making a profit matter more to you or developing the business? The fact is; there is no right or wrong way to answer this question. It all depends on your vision as the business owner.

 

Although a successful business can grow and make profits simultaneously, there may be times when the business owner must prioritize one over the other. This article will examine profitability and business growth to determine which is more critical to a business.



Why is Profitability or Growth Important to a Business?

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One of the reasons for considering profitability or growth is to encourage investors. Small businesses and startups with colossal potential are usually attractive prospects to venture capitalists. For centuries, wealthy investors have always looked to fund various endeavors, from business ideas to experiments, expeditions, and political campaigns. They aim to financially support these ventures to get a substantial return on their investment. However, an investor must be sure of the business owner's vision, commitment and priorities. For some investors, profitability takes precedence over growth, while others prefer the opposite. Thus, the question of profitability or growth is a crucial one for every stakeholder.



A new company can only pay its running costs, staff salaries, taxes, and purchase raw materials from its earnings. Starting a new business is more straightforward than in previous decades. You can develop business ideas, perform feasibility studies, search for a business name, register a business name, and register VAT online. Yet, sustaining the business remains a challenge.



The Case For Profitability

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Prioritizing profit can be reasonable for many reasons. First, a business's primary aim is to make profits. According to a 2019 research, about one in five businesses fail in their first year, while almost a third of start-ups fail in their second year. The inability to make enough profits to sustain the business is the primary reason for failure. In most cases, the business owner solely funds the company either from their savings or through loans. To ensure that they repay the loans and still have money in the bank, making a profit might be the reasonable focus of the business at that stage.

 

Profitability can keep a business afloat. It ought to be a strategy for survival and a short-term approach to achieving business goals. With enough capital, investments coming in, or enough money saved from earnings, an entrepreneur can switch their focus to business growth.



How to Know if a Business is Profitable

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To be sure that a business is making a profit, business owners must understand net profit and gross profit margin. While gross profit is the difference between the revenue from your selling price and cost price, net profit is money that's left after covering all expenses from profits gained. A business is profitable when its overall income is consistently more than its total expenses.



The Case for Growth

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Every entrepreneur or investor hopes that their business maintains profitability. For an establishment to remain successful for a long spell, it needs growth. Business growth is also essential to its profitability. The process of growing a business is similar to building a formidable fortress. The project depends on the durability of its foundation, the strength of its pillars, and the efficacy of its security measures. These essential measures take time to implement.

 

While a startup needs profitability to survive, a business's goal must shift to growth to become an established organization. Identifying and capitalizing on growth opportunities becomes the ideal line of action. When an organization focuses on development, they invest more capital, resources, and time. At this point, a company starts to work on its expansion, how to improve company image, and advanced promotion methods.



How to Know if a Business is Growing

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An entrepreneur sees shreds of evidence of growth by analyzing the increase in staff strength, quality of resources, business exposure, customer conversion, and market penetration. Every business must keep seeking growth opportunities. However, a comprehensive analysis of the company's current situation, strengths and weaknesses, and potential for success are factors to consider before working on a growth plan.



Final Thoughts

The question of profitability or growth in business will continue to divide opinion for a long time. While focusing on profit suits a short-term goal or approach, prioritizing growth implies that the business owner or investors have an eye on the future. Keenness on profitability can help a business survive, especially in the early stages. Meanwhile, seeking growth ensures that a company maintains profitability and relevance for a lengthy period. Both profitability and business growth are vital to having a successful and sustainable business. The priority depends on your goals and vision for the business.



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