When starting out as a new tech business, one of the most common questions that entrepreneurs have to ask themselves is whether to prioritize profitability or growth.
While in an ideal world, the two would go hand in hand, practically speaking, young startup companies may find it difficult at first to find a happy middle ground between the two goals, instead, being left with no choice but to prioritize one over the other.
After all, overextension can be highly counterproductive, with many startup businesses seen to fail early on from wanting too much too soon.
So, if you have recently set up a business and are currently stuck deciding between whether to prioritize trying to grow your business or simply make money from it, this article is designed to help you strategize.
Join us as we take a closer look at what exactly both ‘profitability’ and ‘growth’ actually mean, helping you to determine where to focus your professional efforts in the new year and months ahead.
What is ‘profitability’?In simple terms, profitability refers to the net profit or revenue attained after all the expenses related to the manufacture, production and distribution of products have been deducted. It is, in essence, earned money that is given directly to the owners of the company or its shareholders, ready to be reinvested back into the company in the business will start to fail fairly quickly.
What is ‘growth’?Business growth, on the other hand, is the means by which the initial profitability is achieved. Put simply, without growing a business on the market from the get-go – investing in the right scalable marketing opportunities, building a website, designing a logo – no business of any size or stature will be able to either compete or turn much of a profit at all.
However, business growth can also refer to the expansion of the business over time, essentially making the company bigger, increasing its market value and adding to its overall level of profitability.
Therefore, while it's important to grow your startup business from the beginning, in a sense, most of the business growth you are likely to see will only come after you have prioritized turning a profit.
Profitability vs growth – which one should my business prioritize?Answering this question is tricky because it really depends on a number of factors.
If, for example, your startup business operates within more of a customer service environment, growth strategies can prove more challenging to implement during the early stages. As such, it's important to really analyze your company and look at its key strengths and weaknesses through a SWOT analysis before deciding where your focus – and money – is better spent.
By identifying the areas of your business that could potentially be automated using technology, for instance, this could not only allow you to keep your focus on growth but it will also enable you to reinvest the money you've saved.
In doing so, this will help keep the business’ profitability high, allowing you to utilize other important financial services, such as management accounting – a financial service designed to provide a clear idea of a business’s profitability after any annual tax has been deducted.
In other words, while you may have dreamt of becoming the next Jeff Bezos, business growth isn't something that can be rushed – in fact, you could only end up losing money by investing it in the wrong way.
Combining profitability and growthOf course, it is also important to point out that profitability and growth do not need to be at odds with each other. There are many opportunities for a business to take actions that lead both to better profitability and increased growth. A good example of this is investment in innovation.
Businesses that put money into research and development (R&D) in order to innovate, not only have the opportunity to create better products and services, which is important for both growth and profit. For instance, during 2021, planned reforms to R&D tax relief were announced in the UK’s Autumn Budget to “support modern research methods by expanding qualifying expenditure to include data and cloud costs”. These will be especially valuable for businesses just starting out, which are more likely to be relying on these sorts of technology.
Getting tax relief can be an important way to maximize a business’ profits, while also providing the kind of innovation that fuels growth. This shows us that we don’t have to see profitability and growth as a binary choice.
To summarizeStarting out in business can be an incredibly tricky venture full of difficult decisions to research and make on a day-by-day basis. However, when done in the right way, it can be one of the most stimulating and rewarding things that you can do.
Fundamentally, deciding between prioritizing growth or profitability as a startup business comes down to how much capital you have already. The two really do go hand in hand, after all, so if you have the financial resources available to grow your company, you could see much higher profitability as a result.
Conversely, however, if you are on more of a shoestring budget, prioritizing making a profit is absolutely imperative during the early stages. Otherwise, your business could wind up failing before it has even had a chance to get going.