Understanding Profitability and Growth for Small Business Success
Most small business owners launch their ventures because they have a passion, want to be their own boss, and crave higher earning potential. However, if you don’t make a profit and grow your company, you have a hobby — not a successful business. Carefully guiding and monitoring your company’s profitability and growth is crucial for long-term business success. Fortunately, you don’t need a background in finance or accounting to understand your company’s financials. We’ll explore tips for getting a handle on your small business’s finances and explain what you should know about profitable growth.
The Relationship Between Profitability and Growth
Profitability and growth dictate many crucial business decisions. They’re intertwined and codependent; both are necessary for any company’s long-term success. You can only continue being profitable if your business grows. Here are the key differences between profitability and growth, as well as more about their complicated relationship.
Profitability
Profitability refers to a company’s net profit after expenses. Profit is money in the bank you’re not reinvesting into continued operations. Profit goes to shareholders or can be reinvested in growth opportunities, such as product expansion or opening another business location. Profit may be your company’s only capital if you don’t want to find business investors. A business can’t survive for long without a profit. Business financing offers you a chance to gain profitability in the future. However, you would need to pay off that debt before your company could look into further growth opportunities.
Growth
Growth occurs after a company has reached initial profitability. When a company has made a profit, owners may consider ways to make more money and stay in the black. Extensive growth beyond profitability may not be critical in a business’s early stages. But, it should be part of your long-term business goals. In your business plan, you may include a business growth plan with projections on how and when you plan to grow the company. For example, you may plan to enter new markets, expand product lines, open new locations or franchise the business. You can measure growth by metrics like your total sales, customer base or staff size, or number of locations.
Growth strategies often include the goal of keeping profitability consistent. Growth can undermine profitability in some instances because of the expenditures required. However, short-term profitability is not a typical business goal. Healthy growth helps a company with long-term capital goals.
Tips for Achieving Profitable Growth
Companies must be proactive to ensure they achieve growth and profitability. Consider the following ways to achieve profitability through growth strategies.
1. Establish a Firm Business Foundation
Profitable growth cannot occur without a solid business foundation. Before proceeding to more detailed growth and profitability strategies, analyze the basics to ensure you’re ready for the next steps.
- Does your business have a clear vision and mission?
- Have you set achievable business goals?
- Do you have tools for guiding product and marketing decisions?
- Is your business on solid financial footing?
- Do you have the right team in place?
- Are you ready to set and track key performance indicators (KPIs)?
- Is your business productive?
2. Maximize Sales from Your Best Customers
Your top customers are the ones who purchase your top-of-the-line products, buy from you frequently and exhibit robust customer loyalty. They can be crucial to profitable growth, but many businesses fail to maximize their relationships with their best customers. The best CRM software can help you identify your top customers and invest time and attention into these relationships.
3. Limit Customer Attrition
It’s no secret that it costs less to keep your current customers than to acquire new ones. Returning customers spend more than new customers and are more likely to become loyal, long-time patrons. Focus on boosting customer retention with the following tactics:
- Improve your customer service to a customer delight level of support.
- Closely monitor your churn rate to see where in the customer journey you lose customers — and fix the problem.
- Use CRM software to monitor and track customer behavior over time.
- Send targeted email marketing campaigns to at-risk customers.
4. Implement Upselling and Cross-Selling Processes
Upselling and cross-selling strategies are a great way to optimize sales and profitability from current customers. Try the following to maximize upselling and cross-selling potential:
- Educate your staff about your product line and how items relate to each other.
- Train sales personnel to suggest products to customers that complement current purchases.
- Program your e-commerce website with suggestive selling tactics.
- Send post-sale emails to customers to suggest products or upgrades that can enhance their experience.
5. Improve Your Targeting
If your marketing strategies cast too wide a net, you’re wasting money reaching people who are unlikely to buy. Take the following steps to improve your targeting:
- Use CRM data to identify your customers’ deeper shared demographic, geographical or product-based characteristics.
- Build customer personas for each notable customer segment.
- Decide what ideal target market or markets to pursue.
- Customize your marketing messages to these personas’ needs.
- Direct social media marketing campaigns to the platforms where they spend time.
This attention to targeting your most promising customer base will improve your marketing ROI — bringing in more qualified leads for less money.
6. Minimize Customer Friction
The easier and more convenient it is to buy from you, the more your leads and traffic will convert to sales. Eliminating friction is critical to a great customer experience and increased sales and profits. To minimize friction, smooth and fix anything along the customer journey that makes it unclear, confusing, difficult or frustrating for customers to complete a sale.
7. Work to Increase Your Market Share
Entering new markets is a straightforward way to grow a business. However, thorough research and strategic planning are essential. You must understand the competition and customer preferences before expanding. Consider testing your offerings with pilot programs or regional rollouts to gauge demand. Your new region will likely also need an updated or tailored marketing plan. Prioritize markets that align with your growth goals and have the potential for sustained profitability.
8. Introduce New Products and Services
Increasing your offerings is another straightforward way to expand your business and increase its profit potential. This strategy allows you to satisfy current clients and attract new ones. Before expanding your offerings, ensure your core products and services are in excellent shape. Consider adding features, bundles or premium versions — then look to complementary products and services you can offer to the same or similar customers.
9. Merge with or Acquire Another Organization
Mergers are a common, fast-tracked way for companies to grow within their industries. Concentrate on businesses that complement or align with your current venture. For example, if you run a successful IT service, you could merge with a cybersecurity company to increase your profits.
10. Open a New Location
To increase your customer base, you could launch new stores or branches nearby or in a new region. However, note that expansion comes with significant costs, including real estate, staffing and marketing expenses. Conduct thorough market research to ensure a new location is viable and will help your business thrive. Beyond opening a physical location, you could also expand by selling online via an e-commerce store.
11. Bolster Your Organic Growth with Strategic Acquisitions
Acquisitions give you instant growth in customers, locations and reach. Use them to cross-promote and reach new markets. Strategic acquisitions should align with your business goals and provide long-term value.
What to Know About Achieving Profitable Growth
Achieving profitable growth is a hard-won goal that can be challenging. Keep the following advice in mind on your road to profitable growth.
1. Revenues Are Not Profits
Contrary to popular opinion, sales alone do not drive profitable growth. Increasing sales is only one part of the equation. The other part is your ability to manage production and operating costs. Your revenue is the money your business brings in from the sale of goods and services. Profits are what’s left over on your profit-and-loss statement after subtracting taxes, interest and the necessary fixed and variable expenses. Fixed and variable expenses are related to running the business and creating its products and services.
It’s possible to increase your sales but experience a profit decline. This can occur under the following circumstances:
- Your sales increase comes from higher sales of low-margin items while you suffer a decrease in sales of high-margin products.
- The cost to produce your product rises more than your revenue.
- Your operating expenses erode the revenue generated from product and service sales.
A successful company usually grows its customer base and revenue over time to account for higher operational costs. However, to evaluate your business’s profitability, you must look beyond revenue.
2. Line-Item Profits Can Be More Revealing Than Bottom-Line Profits
Most small businesses focus on their bottom-line net profit to measure their success during the year. However, that doesn’t give a clear picture of what’s happening in the business. Many small businesses can’t identify which of their product offerings or customers are profitable. That means they’re making decisions about what to sell, to which customers, at what price and with what resources based on limited information.
You must examine each product line or service’s contribution to the bottom line. Break out your sales by product line and service, then compare them year over year. Do you have any products that are losing sales? Key customers may be ordering less, there may be product quality issues or pricing could be out of line.
While many costs can’t be attributed to any one product, allocate your sales costs and as many operating expenses as you can to each product. Are any products generating losses? It may be time to consider revamping the product or product creation process to make it more appealing to customers — or retire that product entirely.
3. Margins Are the Yardstick of Profitability
The real tool for evaluating profit isn’t a dollar number; it’s a profit margin percentage. Profit margins can tell you the following:
- Whether products are priced and promoted to drive profitable growth.
- Whether the products and services offered are profitable or not.
- The value of each customer relationship.
- Whether or not your resources are allocated efficiently.
4. You Can’t Rely on Financial Software Programs Alone
Many small businesses rely on the best accounting and invoicing software to track their financial data. While these programs are excellent tools, they have some downsides. The downsides include:
- Financial software doesn’t tell the whole story.
- Financial software tools don’t present a comprehensive picture of your finances to help you assess your business’s health.
- Financial software doesn’t explain your growth strategy.
- Financial software is only as accurate as your input.
Qualified bookkeepers and accountants will understand the latest policies. They’ll also produce accurate books, ensure compliance with IRS methods, and provide business consulting and advice. It’s also a good idea to have an accountant review your books at least annually to advise you on financial strategy.
Set Up Your Business for Profitable Growth
Most business owners plan for growth, but not all will create a plan that effectively ensures profitable growth. Growing your sales while focusing on profit margins can help your business find long-term success. Plus, consulting expert financial professionals can keep you on the right path to profitable growth.