An entrepreneur builds a business for two reasons – either to make money from profits or to grow. Choosing which way to go is surely an ‘Entrepreneur’s dilemma’ - if they focus on growth, it may have short-term dents on their profits and if they choose the latter, it will limit their market expansion and penetration.
To understand Profit versus Growth debate, let’s define these two terms first -
1) Profit: It is the fiscal advantage obtained when the revenue from a business activity exceeds the costs, expenses, and taxes required to sustain that activity.
2) Growth: It is an increase in dimension, quantity or worth of a business unit - a point of expansion or opening of additional options to generate more business profit.
For any self-funded startup, Profit is the primary goal because it is the only capital that will be used to run and sustain the business. Bottom line being – for any business to survive for a significant amount of time, profit is essential. Focusing on profitability during the teething period of a business is necessary.
But once, the business moves beyond the start-up phase, the focus should shift from profitability to growth.
Growth, for a business, could vary. Some may measure it as an increase in their Tangible assets such as building a new office, enlarging their infrastructure and resources, launching new products, increasing customer base, entering new markets etc. But for some it is the rise in their Intangible assets that matter such as business from repeat customers, training their resources, customer relationship, acquiring patents and licenses, Trademarks and copyrights etc.
Even if the present profitability of a business is good, it should not stop exploring opportunities for growth because it is these opportunities that will bring the business ‘in-line’ with its competitors and ‘in-sight’ of its potential customers and investors.
“If you keep an eye on profit, you’re going to skimp on the product. But if you focus on making really great products, then the profits will follow.”- Steve Jobs.
Growth and Profit go hand in hand!
If profitability is the key to basic financial survival, growth is the key to long-term profit and sustainable success.
There will always be a state of flux related to growth versus profitability in business but the entrepreneurs need to be agile enough to foresee what makes sense to them and when.
Young businesses should ‘go for growth and pause down on profitability’ so that they have a firm hold in their market space and are undeterred by any competitive tides.
A long-term vision ensures that continuous investment in growth makes the business sustainable and eventually profitable.
The only catch is when you say you need to invest in growth, your short-term profits only have one way to go – downward!
Here’s why investing in business growth should be the primary objective of an entrepreneur-
It creates brand leverage.
It accelerates your crowdfunding efforts.
It sells directly to people who know your work.
It encourages word of mouth beyond your community.
Take for example Zomato – “one startup that has grown internationally in a way with no exemplar in the entire Indian consumer startup ecosystem till date. Today, it is the number one player in 18 out of 23 countries. In spite of a turbulent 2016 where it battled high cash burn; its strategy has always been - getting to the right users/customers to try out their product in a way that they keep using it.
But with the year 2017 coming in a significant turnaround to their financial losses, the company is confident about their track of profitability. Their focus on reducing cash burn, ramping up revenue, and not compromising on any growth engines have been the key ingredients to their profitable journey.”
A strategy that focuses on growth is an absolute key, but situational awareness and continuous testing of this strategy are equally critical. As a thumb rule, focus on growth but be realistic and achievable in terms of the profits to cloud the bigger picture.
“In the business world, everyone is paid in two coins: cash and experience. Take the experience first; the cash will come later." - Harold S. Geneen