4 tips to juggle growth and profitability with ease
At what level do you rank the growth and profitability of your business? Many business leaders want growth at any cost. For, high-growth companies are often better valued than slower-growing companies in the same sector. However, if the turnover increases at the expense of gross margins, your company is at risk.
On the other hand, focusing solely on profitability by limiting spending can lead to stagnation. Whether you are focused on growth or profitability, you need to know when and how to include them in your business culture and activities. Here are four steps to better balance the two.
Decide what the purpose of your business is
Is it to maximize revenue or achieve a certain level of profitability? Or is it a bit of both? Every entrepreneur will have a different answer to these questions. For private businesses that support their owners, maximizing cash flow may be the ultimate goal. If you are focused on growth and you suffer losses, you should have a clear plan and an up-to-date schedule to deal with the dark times ahead. SOEs will focus on maximizing the share price of the company, which often means trying to positively position the company in growth or profit against others in the same sector.
Use the “rule of 45.”
For a company that wants to achieve an exceptional valuation in the market, its annual growth rate plus its operating margin must necessarily exceed 45 percent. While this is just a rule of thumb, it is surprisingly valuable in thinking about the balance between growth and profitability.
At the other end of the spectrum, if a company does not grow or develop slowly, it needs an operating margin above 45 percent to reach a high valuation level. High operating margins are very difficult to obtain and even more difficult to maintain over time. This is just a point of support for the idea that businesses cannot stagnate for a long time and remain useful or relevant.
Use the Rule of 45 as a simple way to compare your business with the best in the world. If you are trying to achieve a certain rate of growth, consider how this work could affect your operating margin. If you are fighting for a certain level of profitability, consider how this might affect your ability to grow.
Communicate goals to everyone.
Regardless of the overall goal, it is your job to clarify the financial goals of the company and communicate them to all team members via quarterly plans, annual plans, and a three-point plan. at five years old. The purpose of these plans is to help the team understand the inevitable short- and long-term trade-offs between growth and profitability, and how these compromises will bring society closer to your vision. Knowing the goals will help employees make the right decisions.
Provide the appropriate resources
If you want to grow, you cannot limit expenses. You need to invest in new ideas, new products, and new resources to maximize productivity. But you have to balance these investments with the long-term plan so as not to hurt the potential profits. If you want profitability, you will still need to provide resources to maximize productivity and maintain sufficient growth to ensure that the company is moving forward and remains relevant in adapting to changing market conditions.
Successful businesses will have a high level of profitability while experiencing very rapid growth. Of course, achieving this combination is almost impossible because strong growth is a drag on profitability. Finding the right balance means guiding and driving your business with a master hand. It’s your turn!