Are growth and profitability of a business linked?

Growth-and-Profitability of an SME Business

Growing profitably is the holy grail of good management. Research has consistently shown that as companies grow their revenues, they become more profitable, on average. Businesses with 50 or more employees typically generate 6x more net income than smaller firms. This begets the question – what links growth with profitability? For Small and Medium Enterprises (SMEs) often, sometimes with scarce resources to deploy, the answer to this question could unlock significantly business value.

Multiple components of a business need to be balanced to achieve profitable growth. Consider the following:

Scale Economies

Very simply put, this is a concept where your cost per unit of product manufactured or service delivered falls as volumes (or sales) increase. A software company incurs product development costs initially during software design and development. However, the costs of producing additional copies, as more and more customers demand the product, continues to fall per copy of the product sold. Of course, here we assume that the costs to acquire customers (such as marketing and sales, for e.g.) do not increase faster than your other expenses. The same principle holds true for manufacturing or any other sector, for that matter. The more you sell of the same product or service in the same market, other expenses being same, the more profitable your business will be

Customer Growth

As an SME owner you must have experienced the struggle (and joy) of winning your first customer. Your sales effort to now acquire your second customer, however, just got a lost easier. As more customers buy your product it becomes easier to convince yet more (new) customers to do so, i.e., the more you grow the more customer acceptance you get.

Competitiveness

Many companies build competitiveness by investing in strong Research & Development, or making products easy to use, or investing in strong marketing and sales capabilities or superior customer service. Building these elements of competitiveness need investments. The more profits you have the larger is your ability to invest in areas that you have strategically identified as your competitive factors.

Financing

Every business, whatever stage it is in, requires some form of financing. Many SME owners chose to invest their own personal funds. Others raise either angel or venture capital. For most traditional SME businesses borrowing capital from a bank (debt) is an available path. However, banks require collateral. A business with a strong or growing balance sheet with assets on it will convince banks to lend more. The more you grow, the more profits you generate. The more profits you generate the stronger is your ability to raise more money to generate more growth. It’s (kind of) a cycle that feeds on itself.

Strong Management and Teams

As companies grow complexity of managing the business grows. There are more customers to service, more products and services to build and deliver. In other words – more work to be done. As a founder or owner you alone cannot support all these growing demands. You need to hire managers. Strong managers like to work for companies in which they can see growth and professional fulfilment for themselves. Growing companies become attractive to good managers.

CMC Partners works with SME and owner-managed businesses in identifying pathways to generate business growth and value. Working directly with the owners we help identify hidden sources of growth and competitiveness in the business. We also help manage profitability of the company that ultimately increases business value.

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