FINANCE
By Daniel Morgan, Managing Partner, Haines Watts Esher
What’s more important for businesses – growth or profitability? A debate I often hear is ‘do you want to grow or do you want to be profitable?’. However, it’s not always an either/or situation. Profitability and growth go hand in hand – you need that initial profit in order for your business to survive day to day and you also need growth to cement your long term prospects. The priority between the two will shift depending on where you are along your business journey and it’s important to understand which way you should be leaning at any one time. STARTING OUT – CASH IS KING Profi t is key for that basic survival of a business, and for many owners it is that first goal that they set themselves when they start out on a new venture. Most businesses who have failed have done so because they ran out of cash. Without profi t your business is reliant on external sources of investment whether that’s money from the bank or family and friends, eventually it will run out. For many owners, having complete control of their own business is what appeals in the first place and having a business that is profitable allows you to keep that control over the direction of the business. Growing fast requires capital and the more you need to rely on external investment, the more likely it is you’ll have to dilute that ownership.
AIMING FOR GROWTH When you move beyond the startup phase many owners will shift their focus to growth opportunities. Growth of your business could happen in a variety of ways from tapping new markets, increasing capacity or launching new products. The ultimate aim of growth is to make your business more profitable. Even if your current profitability is steady it is important to explore growth. It allows you to protect your business’s future by increasing overall profitability and allowing your business to adapt to the changing demands of your customers. Businesses that stay exactly as they are now are not likely to remain relevant as time moves on and your competitors’ offerings expand and change.
HOW TO CREATE A GROWTH STRATEGY Having a good eye on your financials will be important when creating your growth strategy. It’s not just about the profit that your company is making, it’s also about cashflow. Do you have enough cash within the business to fund all of your commitments and will you still in six months’ time? You may have had a great year and ended with a profit but if sales have dried up and no cash is coming in then you’ll be in trouble very quickly. When you begin to create your plan it is important to understand what you want to achieve, whether that’s increasing turnover or looking towards exit. Once you have decided your goal you can focus on the areas of business that need that investment. For example, if you are looking towards exit you may need to expand your management team to show potential buyers that the company can run without you. Profit and growth are both key elements for a sustainable business. It can be a balancing act as you move through your business journey.
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