When managers, board members or even company owners are asked what they prefer between profitability or growth, almost automatically a large majority would say that both, however, the answer is not obvious.
It depends on multiple variables and elements to consider about what is best. Here are some reflections on the correlation between the two concepts and how it applies depending on the type of business.
1. Profitable growth
Profitable growth refers to the joint achievement of profitability and growth goals. This is the case of companies that achieve a balance between concentrated and diversified clients, with organic and inorganic growth models and exposure to high-margin, high-growth businesses. They are companies with business models in which the linearity between the new number of clients and the costs and expenses that are activated for their attention is broken. Very few companies manage to maintain sustained profitable growth.
2. Growth first, then profitability
For certain industries, high-growth companies are often more valuable than slower-growing companies, however, this situation is dangerous because growing at exotic rates can lead the company into a valley of death. Supergrowth with low or no profits induces organizations into danger zones due to lack of liquidity, high fixed costs and difficulties to operate on a day-to-day basis. Not focusing on profitability but on growth implies that enough capital will be required to finance growth operations, until the investment actually generates new returns.
While growth is one more variable, many associate it with vain metrics, as they try to impact and focus on growth, without paying attention to what is really “in the bank” after all the corporate effort. Income growth alone rarely creates the great success that entrepreneurs dream of, and worse still, it is sometimes achieved through dangerous borrowing, high risk, or even sacrificing profits.
Indiscriminate strategies of growing just to grow have generated serious strategic errors with dire financial consequences. When organizations become obsessed with growing by excluding other objectives such as profitability from the analysis, they end up competing in markets where they do not have the required capabilities to gain an advantage and in the long term the organization ends up losing important value.
3. First profitability then growth
When a company focuses on profitability by limiting expenses, it can lead to stagnation, a condition that cannot be maintained for long if it is to continue to maintain the value and importance of the company in the market. Unfortunately, many companies find over time that ensuring profitability can be much harder to hit than the numbers associated with growth.
Mature companies understand that making decisions to abandon customers, products or even markets can involve a painful process in the face of growth, but that it is necessary and is almost a healthy practice to safeguard profitability, especially when the ultimate objective of any organization is to create and To distribute value, companies must meet their ability to grow their profits and not simply their income.