The balance between striving for profitability and reinvesting
for growth can be difficult to find.
Every business founder and entrepreneur naturally looks forward to the day their venture turns a profit. But moving towards breakeven point brings with it a difficult question – should you reinvest earnings to underpin faster and stronger future growth or focus on profitability?
There’s no one-size-fits-all answer here, but it’s important to recognise that profitability today is no guarantee of future profitability.
Without investing in your business, there is a danger it will stagnate or be unable to exploit every opportunity.
Businesses may also benefit from having a safety cushion for when they hit uncertain and challenging times.
Amid the COVID-19 pandemic and the broader economic fallout, businesses that put money aside for the future are in a better position to weather the storm.
One way to think about this question is to equate it with your personal finances.
Put a £10 note in your pocket today and it will still be worth £10 in a year’s time.
Deposit the money in a savings account or another type of investment, by contrast, and you’ll earn a return.
Reinvesting today’s business profits wisely will hopefully lead to bigger profits in the years ahead.
To some extent, the balance between profitability and reinvestment will inevitably depend on the nature of the business and the opportunity it is exploring.
In brand new markets where the race is on to grow rapidly and capture share, there’s a real case for maximising investment.
Many of the tech giants took many years to break into profit because every penny they earned was immediately ploughed back into growing in new territory.
In more established sectors, by contrast, growth will not be as rapid and there may be less need to prioritise investment.
One argument to consider is what your financial performance says about validating the sustainability of your business model.
Investing to maximise growth makes lots of sense. But by moving steadily towards profitability provides a validation of your vision, ultimately making the business more stable – and creating more options.
Also, for a founder, there’s a basic point here too. Businesses that aren’t profitable will run out of money and will be continually reliant on investors.
Future investors are unlikely to be focused purely on profitability and will value growth highly.
But investors will invest in you more aggressively if they believe that the business is fundamentally stable or can see a route to profitability.
In other words, the answer to the question ‘is it better to focus on growth or profitability?’ is far from clear.
There is no definitive answer and in most cases, business founders and leaders will be striving for a balance.
Nevertheless, businesses should have a vision of where they are headed, underpinned by a detailed financial plan for achieving their ambitions.
Even if you’re not expecting to be profitable for some time, you should be able to articulate a clear path to profitability, including a timeline.
During that timeline, you can always choose to grow faster and delay profitability. But having conviction that your business model can turn a profit, if you want to, should be part of that decision.
