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How to Effectively Balance Growth and Profitability in Your Business

May 15, 2023

Has your company figured out how to balance the pursuit of growth opportunities with the desire to maximize profits? Here are some things to consider.

The growth-at-all-costs model of the past decade has fallen into question recently as owners and investors begin to realize the potentially detrimental impact on a company’s long-term value. For most businesses, it’s likely that a strategy emphasizing measured growth with a simultaneous focus on profits will prove more effective amidst today’s labor shortages and skyrocketing costs.

Risks of Prioritizing Growth Above Profits

Businesses that are driven primarily by growth can lose sight of their underlying realities, landing them in hot water. Theoretically, it’s great to win a contract to, say, manufacture 10,000 units — but not if you don’t have the current capabilities to fill the order or cash flow to cover the costs to expand your capabilities. And, with the ongoing labor and supply issues, those costs may be much higher than anticipated, further eroding profits.

You need look no farther than the tech world to see the potential dangers. That segment is increasingly littered with hyper-growth companies that have yet to show profits. The valuations of many once-soaring companies are plummeting, and sweeping industry layoffs are making headlines, as markets return to profit-related metrics such as EBITDA (earnings before interest, taxes, depreciation and amortization).

That said, a profits-only mindset that prioritizes cost containment above all else can lead to stagnation. Thriving companies also need to grow their revenue.

Recipe for Balanced Growth

Balanced growth strategies incorporate several best practices, including:

Adopting a customer-centric approach. It’s easier and cheaper to get additional business from existing customers than to find new ones, so take the time to nurture and deepen your customer relationships. You could, for example, collect business intelligence on the challenges and opportunities they face. How strong is their customer demand? Where will their growth come from?

This knowledge can position you as an essential partner, rather than just another line item in your customers’ budgets. By understanding your customers’ needs you can improve their satisfaction and generate positive word-of-mouth — perhaps the most cost-effective way to spur future growth. Consider, too, offering incentives to your sales team to generate additional orders from current clients.

Investing in research and development. While growth-oriented companies often need to pay attention to expenses, it’s generally advisable to maintain a steady investment in R&D. Innovation is the path to competitive advantages, especially in an uncertain economy where competitors are cutting back. But allocate your R&D dollars wisely. By discriminately investing in the areas most likely to generate significant revenue down the road, you boost your odds of securing a foothold in the marketplace.

Analyzing data. Data analytics can provide actionable insights to make better, more-informed decisions and to develop a plan for growth that you can support financially and operationally. Chart your course forward based on evidence, not gut feelings.

For example, data analytics can provide valuable guidance on which R&D projects to pursue and which customers are the most profitable. Analytics can also improve operational efficiencies — and, in turn, profitability — by allowing you to scale resources and make timely pivots on crucial matters like pricing, inventory and production.

Balancing Act

Has your company figured out how to balance the pursuit of growth opportunities with the desire to maximize profits? There’s usually a trade-off between these goals. Contact us for help finding the “sweet spot” will enable your long-term value to soar. We can help you track income and expenses, monitor key performance indicators and make wise investments.

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