Small business owners face a myriad of challenges. Among the list is the ability to effectively balance growth and profitability. While profitability is critical to business success, a company’s growth is imperative for long-term survival.
To endure in a competitive environment, business owners must have adequate financial resources and generate profits. But while profit is essential, growth must not be overlooked, as it is necessary to drive revenue as well as attract potential investors and lending institutions.
In the past, businesses of all sizes focused their efforts on growth, with a strong emphasis on reinvesting profits back into the company. But eventually, this mentality shifted, and business owners turned their attention to their company’s bottom line. However, successful ventures need a healthy balance of both profitability and growth in order to thrive and rise above the rest.
Balance doesn’t necessarily require a shift between each element, although there may be legitimate instances when companies may need to highlight one over the over. In the early stages, for example, a business may want to focus on generating profits rather than increase its growth, or vice versa.
While it can be tempting to focus one’s energies on profitability, this single-minded strategy can choke a business in the long run. Amazon, for instance, required decades of work to demonstrate its profitability (to the displeasure of its shareholders), but that’s because its vision was based primarily on growth.
As a small business owner, striking the balance between growth and profitability is an advantage that can establish a bottom line valuation, which can be instrumental in securing the financing or investment capital needed to expand the business further.
Some of the key ways in which small businesses can strike a balance:
- Cash Flow – Whether it’s a home-based start-up or a rapidly expanding company, the golden rule is to have 6 to 12 months of cash in the bank at all times in order to service any net losses.
- Establish Targets – A solid way to balance growth and profitability is to establish some corporate targets. One example is to set a minimum profit level and allow for growth-focused investments with any profits that exceed that target.
- Proof of Concept – In the early stages, a company should be focused on proof of concept and display a solid market fit. It’s important to generate revenue during this time, in order to verify that customers will pay for the product or service. From there, calculations can be made to determine the volume required for profitability.
- Tap into Existing Clients – One highly effective way for a small business to build profitability and growth simultaneously is to tap into an existing client base. As a rule, it is easier and less expensive to increase business through an existing clientele than to attract new customers. Volume discounts, loyalty programs, and new offerings are all techniques that can help expand an existing clientele.
- Cost-to-Serve – Rather than take on every new opportunity that presents itself, it’s important to ensure that profit margins are protected. A cost-to-serve analysis will pinpoint exactly how profitable a particular client will be and which ones may actually generate losses for one’s business.
- Scalability – Many companies of all sizes attempt to grow rapidly without understanding how to scale soundly. As a company grows, it must secure proper resources or risk jeopardizing profitability. It is important to create a plan and ensure that the business has the bandwidth, systems, finances, and people in place to accommodate anticipated growth.
- Collaboration – Small business owners may be tempted to micromanage in an attempt to control their financial resources. Using this type of active, hands-on approach is beneficial, but only when done moderately and reasonably. Taking on too much can result in the collapse of a company. Many small businesses cannot afford to hire new talent, especially in the first few years; however, without delegating, it is difficult to grow. In today’s freelancing economy, it is now easier than ever for small businesses to acquire the talent they need to progress. Allocating resources on an “as needed” basis helps maintain much needed cash-flow while facilitating practical growth.
- Strategic Partnerships – Small businesses that work with complimentary businesses can help secure new clients or expand services to existing clients quickly and efficiently, saving both time and money.
- Update Business Plan – Every business, regardless of its size, should write a business plan of its mission, strategies, and financial goals, and revisit/update these on a regular basis. Doing so will help business owners adjust to fluctuating markets. By assessing and re-examining the market climate, target market, and competitive environment, and by conducting a SWOT analysis, a company can follow the path to growth and profitability in a more efficient manner.
- Referral Strategy – A referral strategy is an impactful way to attract new customers. By tapping into an existing client base and asking for recommendations, new customers can be secured with minimal investment, helping to grow the business and generate profits simultaneously.
Large or small, companies need to be agile and learn to shift their business focus during their different stages of growth.
Home-based entrepreneurs face some unique challenges when it comes to adapting different strategies for growth and expansion in order to overcome obstacles and capitalize on opportunities.
As demand increases, business owners must have the right systems in place in order to drive profits and expand their operations without sacrificing the qualities that made the business popular in the first place.
When it comes to small businesses, knowing when to focus on profitability or growth is crucial, but the ability to balance both in a seamless way is the key to long-term, sustainable success.
