Growth vs. profitability

I’m capitalising on increasing demand to grow my distribution company, but we’ve struggled to get to profitability. Existing investors don’t seem to be concerned and I believe they’d be willing to put up more cash to grow top-line revenue, but is this risky in a troubled economy? Is it wise to adopt a more conservative approach? And how can we develop a business model that means we’re not trading-off revenue against profit?

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A. Piers Linney writes:

A loss-making business like yours, that appears to have limited financing options as a result of the lack of available equity and bank debt, and is faced with flat or falling
revenues, carries a great deal of risk.

Clearly, the primary objective in this situation should be to survive, and that may require difficult decisions and reduced growth expectations. Many small businesses have had to look closely at their cost bases, and, in many cases, latent efficiencies and new cost-saving opportunities have been uncovered.

This means that it’s a good idea to reappraise every cost. If you do this with your business, you may well be surprised at how much you can save by either renegotiating with suppliers or simply taking your business elsewhere.

However, cost saving is only one part of the equation. It’s still possible to grow in difficult markets by winning market share, especially if you have access to capital. It’s crucial that you ensure that every single new business opportunity is efficiently followed up, and that your customer relationships are well managed to encourage loyalty.

It sounds as though you have investors that are supportive, and I assume this is because they believe that your business has a competitive advantage and growth potential. Perhaps they feel that they are already sitting on a paper profit worth protecting.

If you absolutely require new capital, it is important that you can present your existing investors with a prudent plan that explains how you expect to grow your top-line and reach profitability based on an optimised cost base. This will also maximise the company’s valuation for any equity financing and reduce your dilution.

History has shown that those businesses that remain active, continue to invest and win market share during recessions emerge as the winners. This is compared to the outlook for those that have chosen to effectively hibernate.

In summary, you need to balance a need for new finance to cover costs with a need for growth capital to grow market share. Ensure that your costs are as low as they can realistically be, so that you have more money left for the latter.