Balance Growth vs. Profitability With These 4 Tips

CEOs must know whether they are prioritizing growth or profitability and manage accordingly.

learn more about Joel Trammell

By Joel Trammell

Shutterstock.com

Opinions expressed by Entrepreneur contributors are their own.

Where do you fall right now on the growth vs. profitability spectrum? Many CEOs will push growth at all costs. After all, high-growth companies are often dramatically more valuable than slower-growing companies in the same industry. However, if as revenue grows profit margins become negative, the CEO may be driving the company toward a death-by-growth experience.

On the other hand, focusing on profitability by limiting expenses can lead to stagnation. Whether you are focused on growth or profitability, you must know when and how to build each into the culture and operations of your company. Here are four steps to balance both.

Decide what the goal of your company is.

Is it to maximize revenue or hit a certain level of profitability? Or is it a bit of both? CEOs of different companies will have different answers to this question. For privately held companies that are supporting their owners, maximizing cash flow may be the overwhelming goal. If you are focused on growth and are operating at a loss, you should have a clear plan and potential timeline for heading into the black. Public companies will be focused on maximizing the share price, which often means trying to positively position the company in either growth or profit against others in the same industry.

Related: 7 Key Steps to a Growth Strategy That Works Immediately

Use the "Rule of 45."

An experienced Wall Street banker once told me about his "Rule of 45." He explained that for a company to achieve an exceptional valuation in the market, its annual growth rate plus its operating margin needed to exceed 45 percent. While this is just a rule of thumb, it is surprisingly valuable in thinking about balancing growth and profitability. At one extreme it means that if you grow at a rate north of 45 percent, you can break even or actually operate at a loss and still be rewarded in the market.

On the other end of the spectrum, if a company is not growing or is growing slowly, it needs an operating margin north of 45 percent to achieve a high valuation. High operating margins are very tough to obtain and even tougher to maintain over time. This is just one supporting point for the idea that companies cannot stagnate for very long and remain valuable or relevant.

Use the Rule of 45 as a simple way to benchmark your business against the best in the world. If you are striving for a certain growth rate, consider how that might affect your operating margin. If you are striving for a certain level of profitability, consider how that might affect your ability to grow.

Related: Don't Try to Maximize Growth and Profitability at the Same Time. It's Impossible

Communicate the goals to everyone.

Regardless of the overall goal, it is your job to clarify the financial goals of the company and communicate them to every member of the team via quarterly plans, annual plans, and a three- to five-year plan. The purpose of these plans is to help the team understand the inevitable short and long-term tradeoffs between growth and profitability as well as how making those tradeoffs will move the company closer to its vision. Knowing the goals will help employees make more informed decisions in support of them.

Provide the proper resources.

If you want growth, you cannot limit expenses. You have to invest in new ideas, new products, and new resources in order to maximize productivity. But you must balance those investments against the long-term plan for eventual profit. If you want profitability, you will still need to provide resources to maximize productivity and maintain enough growth to ensure that the company is moving forward and staying relevant by adapting to the changing market.

Related: Choosing a Business Model That Will Grow Your Company

The most valuable, successful business would have a high level of profitability while also growing very rapidly. Of course, achieving this combination is almost impossible, because high growth is a drag on profitability. Finding the right balance means leading your organization to success.

Joel Trammell

Veteran CEO; CEO, Black Box; Founder, Khorus

Joel Trammell is CEO of Black Box, which provides IT infrastructure services, and the founder of CEO software company Khorus. He is also the author of the The CEO Tightrope.

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business Solutions

Learn to Build a ChatGPT Bot for Only $30

If you want to see what AI can do for your business, grab this course bundle today.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Thought Leaders

The Collapse of Credit Suisse: A Cautionary Tale of Resistance to Hybrid Work

This cautionary tale serves as a reminder for business leaders to adapt to the changing world of work and prioritize their workforce's needs and preferences.

Health & Wellness

5 Essential Steps to Expand Your Vision and Start Living Your Dream Life

It's time to break free from your comfort zone and expand your vision. When you refuse to settle for a mediocre life, you can start building a life you love.

Business Ideas

55 Small Business Ideas To Start Right Now

To start one of these home-based businesses, you don't need a lot of funding -- just energy, passion and the drive to succeed.

Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.