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Profitability Versus Growth: A Balancing Act For Startups

It’s a question that most entrepreneurs will have asked: should you keep your profits or reinvest them in growth? Ploughing every cent back into production has traditionally been a golden rule of survival for fledgling startups. Yet there will be times when it is better for the business to focus on one rather than the other, and success will depend on finding a balance between the two.

“Ninety per cent of the time a founder should reinvest their profits back into their business, because it helps them grow and means they won't stagnate,” says Matt Jonns, founder of ucreate, a co-creator of software startups. "However, the unpredictability of startup life can make the use of profits to shore up cash flow a smart decision. Keeping this money aside for a rainy day is often just as important as reinvesting and could be the difference between survival and extinction when times are at their hardest."

Since its launch in 2012 ideas portal 7billionideas has put 100% of its profit back into the company. “A pound in my back pocket, will still be a pound in a year’s time, but a pound invested into our business, will significantly grow," says group CEO David Harkin. "It is imperative to invest in our clients, our services and our staff. Diving into the profits, particularly in the early years of a company, could be a risky strategy.”

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What is more important for a business, profitability or growth?

To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's long-term survivability. A company's net profit is the revenue after all the expenses related to the manufacture, production and selling of products are deducted. Profit is "money in the bank." It goes directly to the owners of a company or to shareholders, or it is reinvested in the company. Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation’s only capital. Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. The bottom line is that no business can survive for a significant amount of time without making a profit. That being the case, the measurement of a company's profitability, both current and future, is critical in the evaluation of the company. Although financing can be used to sustain a company financially for a time, it is ultimately a liability, not an asset. An income statement shows not only a company’s profitability but also its costs/expenses during a specific period of time, usually over the course of a year. To compute profitability, the income statement is essential to create a profitability ratio. A number of different profitability ratios can be calculated from which to analyze a company's current financial condition.

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