Expansion does not always equate to profits

‘Fast growing’ does not always equate to ‘profitable’. At times we wrongly assume that a company expanding its operations is also making profit. Many companies have shut their doors by prioritizing ‘growth’ above ‘profits margin’.

What’s the difference between ‘company growth’ and ‘company profit’?

The common dictionary defines ‘growth’ as the process of increasing in size. In business, the term ‘growth’ refers to a company’s increase in size. The same increase is seen through an upscale in the number of employees, in the number offices located nationally or worldwide,number of company cars, etc…

On the other hand, the common dictionary defines ‘profit’ as a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something. Profit only occurs when a company’s income is greater than its spending. Profit is essential to guarantee the longevity of a business. A company that spends more than it earns, will eventually close down.

A company’s growth is not necessarily a sign of profit. Certain companies often make the mistake of growing too fast and too early, thus leading them to spend above their earnings. They key question is:
‘If a company’s growth exceeds its earnings, then how does it pay for its maintenance and operation costs?’

Various corporations and start-ups rely on loans and angel investments to cover their exceeding growth operations. At times, angel investors are under the illusion that the companies they invest into are profitable due to the visible signs of growth. While in fact, it is not always the case.
Fast growing companies neglecting the element of profit, often find themselves in troubles when investors start demanding the interests on their investment…

When companies fail to produce the interests on their investment received, they have no other recourse than to sell their assets or let the bank repossess everything.

Failure to prioritize profits above expansion is one of the main reasons big companies shut their doors.
One has to be wise before expanding.

Profit must always precede growth; it is a business rule of thumb. Sometimes as dreamers or big visionaries, we tend to fall for the temptation of expanding fast for new frontiers…however, certain expansions need to wait.

Patience is key.