- January 21, 2022
- Posted by: Manuels Effe
- Categories: Competitive research, Insight
Notwithstanding that the number of registered small businesses has continued to increase steadily since 2010, we are consistently faced with many factors to examine when we open a new business, whether online or offline.
The primary of them is what could be most important to the business.
It’s the quest of every business owner to make a profit, just as it is for their business to grow. But in ideal circumstances, business owners define when to determine their priority: business growth or profitability, raising the question of whether making a profit matters more or developing the business?
However, you go about answering the question depending on your vision as the business owner. While a successful business can simultaneously grow and make a profit, times come when the business owner dutifully prioritizes one over the other, a reason we need to examine business profitability and growth here to get an impetus that is more critical to a business.
Importance of Business Profitability or Growth
Profitability or growth is essential to encourage investors. Small businesses and startups with colossal potentials are usually very attractive to prospective investors, wealthy investors, being always very keen on funding good endeavors- business ideas, experiments, expeditions, and even political campaigns. The aim is usually to support the ventures financially and get a substantial return on their investment. But it remains a primary goal that an investor is sure of the business owner’s vision, commitment, and priorities. While for some investors, profitability takes precedence overgrowth, for others, the opposite is preferable, making the question of profitability or growth a crucial one for every stakeholder.
A new company is only able to pay its running costs, staff salaries, taxes, and purchase raw materials from its earnings. From all indications today, starting a new business is more straightforward than before now. You develop business ideas, perform feasibility studies, search for a business name, register a business name, and even VAT online but sustaining a business remains a challenge.
Prioritizing profit could be reasonable for many reasons, knowing firstly that a business’ primary aim is to make a profit. However, a 2019 research finding had revealed that about one in five businesses fail in their first year, just as almost a third of such start-ups fail in their second year due mainly obviously to the inability to make enough profits to sustain the business. Business owners in most cases solely fund the business either from their savings or with loans at that stage. Making profit then becomes the reasonable focus of the business to ensure that they repay the loans and still have money in the bank.
Profitability can keep a business afloat, being a possible strategy for survival and a short-term approach to achieving business goals. But with enough capital, investments coming in, or enough money saved from earnings, an entrepreneur switches the business’ focus to growth.
Knowing that a Business is Profitable
To be sure that a business is making a profit, business owners must understand net profit and gross profit margins. While gross profit is the difference between the revenue from your selling price and cost price, net profit is money left after covering all expenses from profits gained. A business is profitable when its overall income is consistently more than its total expenses.
It’s usually the hope of every entrepreneur or investor that their business maintains profitability but for an establishment to remain successful and be sustained, it requires growth, just as it’s essential for its profitability. Growing a business is similar to building a formidable fortress, depending greatly on its foundation’s durability, the strength of its pillars, and the efficacy of its security measures, all essential measures that take time to implement.
While a startup needs profitability to survive, a business’ goal must shift to growth to become an established organization. Identifying and capitalizing on growth opportunities become the ideal line of action, bearing in mind, however, that when an organization focuses on development, it invests more capital, resources, and time, working on its expansion, improving its image, and advanced promotion methods.
Knowing that a Business is Growing
Entrepreneurs see shreds of evidence of growth by analyzing increases in staff strength, quality of resources, business exposure, customer conversion, and market penetration. Every business must continue to seek growth opportunities, realizing that a comprehensive analysis of the prevailing situation, strengths and weaknesses, and potential for success are factors to consider before working on a growth plan.
On the whole, profitability or growth in business will keep dividing opinion for a long time to come. While focusing on profit suits a short-term goal or approach, prioritizing growth implies that the business owner or investors’ eyes are on the future. Keenness on profitability helps a business to survive, particularly in the early stages, but putting the eyes on growth ensures that the business maintains profitability and relevance for a lengthy time. However, profitability and business growth are vital to having a successful and sustainable business, leaving your priority depending on your goals and vision for the business.