Should your business aim for profits or growth?
Wednesday, February 8, 2012/
The ultimate financial objective of your business should be to maximise profits.
However, in the early stages of your start-up, you have to focus your energy on growing your business in order to take advantage of business opportunities in the future.
Growing your business means investing in resources (such as staff and equipment) that will allow you to generate profits in the long-term.
But in the short-term, these resources are expenses that will reduce your profits.
This leads to the ongoing tension between growth and profit; between short-term pain and long-term gain.
So at what point should you stop investing in growth and start maximising your profits?
The answer should come down to three key considerations:
- How large your business opportunities are.
- The amount of capital available to your business.
- Your mindset and personal finances.
Your business opportunities
If your business opportunities are large and scalable, then you should invest to capitalise on them. However, you need to make sure that you continue to validate your assumptions about your opportunities and market size.
You also need to keep track of how you’re performing against your targets and key financial expectations. If your targets are not being met, stop investing.
This is subject to you having enough capital available, when you need it, to meet the investment and timing requirements to scale-up.
These capital requirements could be substantially more than you initially estimated.
For example, if your target market is changing quickly and you have a number of competitors, you may need to invest large amounts rapidly to establish your market position and get your business to a point where it is self-funding.