When you’re starting out in business, you might think increased profitability is the same thing as growth. But there is a difference. And favouring one over the other could land you in hot water.
So what’s the difference, and should you focus on growth, or profitability first?
Profitability
So, the profitability of a business is basically the main goal of all businesses. It refers to the income of the business minus expenses.
So, it’s what the business is left with from their sales figures when all expenses have been paid. These profits can either go directly to the owners of the company and its shareholders, or it can be reinvested in the business.
Profit is the primary goal – especially for businesses with no investors or financing. In that case, profit might be your only capital. So, no business will survive for long without making a profit.
Profitability is to do with analysing a business’s ability to turn a profit over a period of time. So, looking at a company’s income statement would help us to create a profitability ratio which will assess your business’s ability to generate profits over time from sales and operations, assets or equity.
Growth
Most businesses do well to focus on profitability at the very beginning. After-all, a business with no profits will quickly run into trouble.
But you can’t shore up the long term success of your business by completely ignoring growth. Growth means making the company bigger by increasing its market. And this leads to it becoming more profitable.
Even if your current profitability levels are good, you should always explore opportunities for growth to strengthen your business’s long term journey to success. A company’s growth can be measured by analysing sales, expenses, staff numbers and market share.
A Two-Pronged Approach
For a successful and sustainable future, businesses need to pay attention to both profitability and growth. They’ll need profit for their basic financial survival in the short term. But they also need growth to secure long term profit and success.
Any potential investors for a company will want to know about the plans and potential for growth as well as their current and projected profit margins.
Is the future bright?
So how do you know what your business future will look like? With a profit and loss report or income statement, you get a summary of your income and expenses over a period of time.
With this report, you can measure your profits by subtracting your expenses from your income. It can then be used to forecast your future profits by estimating your expected sales and expenses over time.
A forecast like this can help potential investors decide whether you are a safe bet or a red flag.
Safe bet or red flag?
Any potential investor will want a good look at your accounts to see whether you’re a worthwhile investment. They’ll want to know all about your current and projected growth and profitability.
And your projections will give them an idea of how you see your business growing and what kind of return they’re likely to gain. While it’s fine to be optimistic, financial projections shouldn’t be plucked out of the air.
Instead forecasts should be based on research, experience, and an analysis of the historic financials of the business. Prospective investors will want to know all about your revenue, cash flow, profit and loss, and balance sheet.
This can be a lot to get your head around. Need some help? Get in touch today to find out what support we can offer.
