How to overcome the Revenue Vs Profitability issue?
Many SMEs believe that profits are more important than revenue growth and that revenue growth is important only for giant organizations. There has always been a discussion or dilemma regarding whether one should focus on profits or revenue growth. They always discuss how to increase business profits rather than growth.
To analyze this subject we have to consider the following aspects of business:
- Management vision
- The risk appetite of Management
- Cost of debt and cost of capital
- Availability of human resources
- Availability of creative ideas for growth
- Political scenario
Management vision is very important for deciding on profitability v/s revenue growth. Most SMEs think it is important to have smart profits than thinking about future revenue growth. These are the organizations which are control freak. In my opinion, they have a short-term vision, they do not believe in futuristic growth and they do not reap all the profits in business. Therefore, management vision plays a crucial role when deciding between profit or revenue growth.
The risk appetite of management again plays a crucial role in taking any decision on the subject matter. If owners are risk-averse they will always think about current profits and withdrawal of the same from the business.
In our discussions, these SMEs always are interested to know how to generate more profits from business and what should be the business strategy for profit. Very few are interested to know about the strategic future growth of business and market capitalization.
Cost of debt and cost of capital is based on the liquidity available in the market like pre and post covid-19 situation. The certainty and uncertainty in the market play a crucial role in deciding the cost of debt or capital due to risk premiums. If debt and capital are available in the market at a cheaper rate it is always better to think about business expansion and the growth of revenue. If anticipated future ROE is better than the cost of capital or debt, I suggest one to go for revenue growth. If the cost of capital is high go for expanding the margins.
Investors are always interested in growing companies than short-term marginal companies. The best examples are the funded companies startups with long-term vision like Paytm, Zomato, Oyo, Ola, Flipkart, etc.
If there is a scarcity of creative people in the organization, they will always be busy in fire fighting and future growth plan will be ignored. There is a lack of talent and capable resources in the organizations to translate good ideas into growth prospects. Therefore talented human resource also plays a crucial role when deciding between profit and revenue growth.
Many organizations lack creative ideas for growth. They neither have vision nor zeal to implement or cultivate a culture in the organization to produce creative ideas for growth. They are completely dependent and focused on current profitability only.
The Political scenario also tends to influence the decision in profitability v/s revenue growth debate. If political leaders are visionary and the government is stable, it is always better to go for revenue growth.
To summarize the decision on “How to overcome Revenue Vs Profitability issue” it is always better to understand the culture of the organization, availability of resources in terms of 5M, future growth prospects, market size and product demand, creativity and new ideas, owner’s or the key player’s vision, the socio-political environment of the country and the world, short term and long term goals of the organization.
Last but not least engage a good professional advisor on the Board who can guide you to take the best decision in defining the long-term goals for the business and maximize profits along with growth strategies.
This article is written by CA Madhav Agarwal, B.COM, LL.B., ACA, DISA, Master in business finance.
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