There comes a time when every business must think about the question of profitability versus growth. Across the world, global capital abundance and economic growth will show whether your business is better off in either direction. At the moment, there’s an unprecedented capital overabundance. Put simply, this means that there is more capital in the market than ever before. However, how to move from profitability to sustained growth is a complicated, hard question. To change your business’s perspective so drastically takes careful planning and data-driven decisions, as well as proper staff to carry through with the transition, to begin with. As such, let us explore the matter.
First things first, let us define what profitability is. It can be a rather vague term in everyday language, so we should start with a proper definition of what it means in business.
Oxford Languages defines it as “the degree to which a business or activity yields profit or financial gain” and “the state of yielding profit or financial gain”. Those definitions are enough to give us a clear understanding of the term; profitability is a business’s net profit after costs. As such, your business is profitable as long as it stays sustainable and operational.
In this sense, if you have a starting business, profitability is your first goal. Any starting business needs to ensure it remains afloat and profits owners and shareholders, so profitability is a requirement for survival during the early stages. But is survival enough? To maintain interest from current and future investors, you’ll need to consider how to move from profitability to sustained growth. This often includes examining future strategies for improving profit margins or accelerating growth.
In this context, sustainability has two distinct meanings, apart from what the term means in everyday language. Specifically, it can refer to environmentally conscious sustainability, that compares finances with environmental factors, or strictly financial sustainability, that only focuses on financially sustainable operations. Thus, “sustainability” and “sustainable profitability” will often mean financial sustainability; that you can remain in business. Still, both are safeguards for the future.
Investopedia states that environmentally conscious sustainability “focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. [Sustainability consists] of three pillars: economic, environmental, and social—also known informally as profits, planet, and people.”
Practically, then, environmental sustainability is a matter of ethical and moral ways to do business. It is also a potential safeguard against future laws and regulations.
IMD defines financial sustainability as “a business approach to creating long-term value by taking into consideration how a given organization operates in the ecological, social and economic environment. Sustainability is built on the assumption that developing such strategies fosters company longevity.”
So, financial sustainability measures profitability. It is a strictly practical matter; whether your business can remain operational without liabilities such as loans.
With all the above in mind, we should now be able to see why many don’t chase immediate growth. Profitability alone offers you sustainability, and large businesses find that improving profit margins is less risky than pushing for growth. Thus, many prefer to take it slow when moving from profitability to sustained growth, as maintaining growth throughout the journey is no small task.
Sustainable growth rates (SGR)
On this subject, let us briefly consider SGRs. To achieve a sustainable growth rate, a company will need to secure the following in accord with their targets:
- An optimal capital structure, including debt and equity
- Increased sales in accordance with target sales
- A stable dividend payout
Here we’ll find a dilemma; companies that fail to meet their SGR may stagnate, but not attempting to grow post-saturation may not be optimal either. To avoid saturation, many businesses may expand into new products or services to maintain their SGR – but this may come with lower profit margins. Thus, moving from profitability to sustained growth requires very careful consideration of both.
Moving from profitability to sustained growth
Having discussed all of the above, let us consider the key factors that can allow you to safely move from profitability to sustained growth.
1. Operational efficiency and in-house talent
The very first thing you should consider is whether operational efficiency and in-house talent can support growth. If your profitability is questionable or inconsistent, or if your teams’ talent pool is lacking, your growth efforts may fail. As such, you should review your operations and ensure your profit margins are as optimized as possible. Furthermore, you should review your talent pool to make sure that your employees can support your efforts.
2. High-value clients
Next, we should keep in mind that sustained growth hinges on sustainable business relationships. A business’s profitability depends on the ability to maintain a consistent pool of customers, whether they are few high-value clients for such businesses as B2B, or many less profitable customers for such industries as retail. Thus, you should ensure you can prospect the customers that are ideal for your business and industry, through proper mechanisms, software, and overall operational philosophy.
3. Using the proper platforms
On the subject of reviewing operational efficiency and collecting data, you should ensure you’re using the proper platforms. Moving from profitability to sustained growth requires all assets you can use, which definitively includes your platforms of choice. Especially in such cases as eCommerce businesses, choosing the right platform is a vital choice you should not overlook. Thus, you should carefully research all the options available, and choose what is best for your business and your growth goals.
4. Data-driven decisions and bold leadership
Finally, proper leadership during this transition is essential. A leader who strives for growth must be careful and risk-averse, but also optimistic and insistent. Luckily, a wealth of data collection options can inform decisions at the top level and guarantee success. Thus, from the startup to the growth stage, you should guarantee that all administration and management positions are in the hands of the most qualified and prepared among your staff. At the same time, you should ensure that you possess the assets needed to make informed, data-driven decisions.
Conclusion: it may be time to move from profitability to sustained growth
In conclusion, the current global capital overabundance likely makes this the best time to move from profitability to sustained growth. It is no easy or risk-free task, but with proper planning and preparation, it should ensure your business grows and thrives.