Profitable Growth is an imperative
as it benefits ALL corporate stakeholders
The development of a business enterprise (business division, sales division …) is characterized by the development over time of sales revenue and profitability (especially at the income statement stages Gross Profit, EBITDA, EBIT and EAT).
Revenue and profitability may develop independently to some extent, they may grow, stagnate or decline. The figure below shows (based on real businesses) six sales revenue and earnings dynamics examples : growth, stagnation, downtrend, downturn, turnaround and divergence.
Sales revenue(m€), EBIT(m€), EBIT Return on Sales (%)
Sales revenue and profitability typically develop in one of nine typical cases; which are shown in the graphic below.
Profitable Growth (PG) is on hand in case that revenue and profitability grow simultaneously.
Essential PG nuances are sales-progressive profitability stagnation. (revenue grows with return on sales stagnates) and profitability-progressive sales stagnation (revenue stagnates while return on sales grows).
These are bulky terms, nevertheless they are precise from a management technique point of view.
Profitable growth is a strategic business concept that refers to the sustainable increase in a company’s revenues and profits over time.
It involves expanding a business’s customer base, market share, or product and service offerings in a manner that not only drives increased top-line revenue but also results in a positive and consistent bottom-line profit.
Profitable growth typically combines two key elements:
1. Revenue Growth
This involves increasing the company’s sales, either by attracting new customers, selling more to existing customers, expanding into new markets, or diversifying product and service lines. Revenue growth is a fundamental aspect of profitable growth because it drives the top line of the income statement.
2. Profitability Growth
It’s not enough for a business to merely increase revenue; the growth must also be profitable. Profitability refers to the ability to generate net income or profit after accounting for all expenses, including production costs, operational expenses, taxes, and other financial obligations. Profitable growth ensures that a company’s financial performance remains strong and sustainable.
In essence, profitable growth seeks to strike a balance between expanding the business’s operations and ensuring that this expansion is financially viable, resulting in increased profitability and shareholder value.
It requires effective strategy (do the right things) planning, operational efficiency (do the things right), and a focus on delivering value to customers, all while managing costs effectively to maintain a healthy profit margin.
Profitable Growth – the Advantages
Profitable growth offers several advantages that contribute to corporate long-term success and sustainability.
Here are the top 5 advantages of profitable growth:
1. Financial Stability
Profitable growth ensures a steady stream of positive cash flow, which is essential for financial stability. When a business consistently generates profits, it can reinvest in its operations, pay down debt, and build financial reserves. This stability provides a cushion against economic downturns and unexpected expenses.
2. Investment Opportunities
Profitable growth creates opportunities for businesses to invest in their future. They can allocate resources to research and development, expand into new markets, acquire other companies, or diversify their product and service offerings. These investments can lead to increased market share and competitiveness.
3. Attracting Talent
Successful businesses with profitable growth are often more attractive to top talent in the industry. A strong financial position allows them to offer competitive salaries and benefits, provide opportunities for career advancement, and create a positive working environment. This, in turn, helps attract and retain skilled employees.
4. Customer Satisfaction
Profitable growth can result from delivering value to customers. When a business focuses on providing quality products and services, it can build customer loyalty and trust. Satisfied customers are more likely to make repeat purchases and refer others to the business, leading to sustained revenue growth.
5. Competitive Advantage
Profitable growth enables a business to invest in innovation, technology, and process improvements. This can lead to a competitive advantage by staying ahead of industry trends and responding to changing customer needs more effectively than competitors. Maintaining a lead in innovation can be a key driver of long-term success.
Profitable growth is a strategic objective that involves a balance between increasing revenue and managing costs efficiently. Businesses should also consider sustainability and ethical considerations as they pursue growth, ensuring that they are contributing positively to the broader ecosystem and society.