This is my answer to an interesting question on Quora: When should a small business focus on growth over profits?
As soon as you have the cash flow managed, you should focus on growth, not profits.
Profits are today, and growth is tomorrow. You need today assured by cash flow, but don’t sacrifice more today than you have to when you pay for it with tomorrow. Find the right level.
Cash is what’s real; money in the bank. That’s much more important than profit. Growth, meaning higher sales, more customers, is also real. Within reasonable limits, growth is more important than profit. Profit is an accounting and tax concept. You can be profitable and run out of money, and you can be unprofitable and have cash in the bank and grow.
Of course you need profits to survive. However, this question is more interesting than the quick answer implies. And notice the question is properly posed with the word “when,” which is the right way to put it. The real decision isn’t profits vs. growth (you choose profits in that binary world) but rather more profits vs. growth. This is one I lived with for a lot of years in a real business situation.
The underlying principal is hierarchy of values.
- First, you have to cash flow assured (not that a small business ever really does, but let’s say reasonably assured).
- Then you have to have some minimum level of profits (literally, in my business plan, and in management meetings, I specified 2% on sales as a comfortable upper limit on profits).
- But after that – and here’s where this question gets interesting – you encounter a world of small decisions that pit growth against profits. You make choices on product quality, channels, and especially marketing that feel like money going either to build more growth or take home as profits.
I’ve had real-world experience with this for a lot of years and I’m really sure that my choice of priorities – I aimed for 2% profits on sales and 15%-50% growth in sales – worked very well for my business. We grew from a few hundred thousand dollars of sales to $5M annual sales in four years, without outside investors.
Of course the struggling small business that’s operating at the edge needs to focus on cash even more than profits. But a healthy healthy small business, on the other hand, does have a choice between more profits and growth.
Ideally the question isn’t either profits or growth, but rather what’s the level of profits above which you shift those resources to growth. Think of it as a choice between today and tomorrow.
This article was originally published by Tim Berry
Published: December 5, 2014