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Balancing Growth and Profitability

Aug 3, 2017 1:00:00 PM |

Joe Green

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Balance-422678-edited.jpgPlanned growth starts with forming a vision and identifying the steps necessary to achieve it. But the business environment will undoubtedly change as time passes and you implement your plan. Growth plans have to be balanced against the need to maintain profitability as well as the certainty of the unexpected emergency. Once you have a solid vision for your business, you need to get key decision makers on board with managing short-term budget effects in order to realize the long-term value of solid growth. It almost sounds easy when we say it in a blog like this, but it can be the hardest part of getting a business to break through to the next level.

Start With the Endgame

The key to understanding whether a business is ready to forego some short-term payouts in favor of long-term growth lies in the attitudes of the owners. If you’re the CFO at a family business or a publicly traded company that is focused on delivering the largest payment possible to owners every year, you’re going to face an uphill fight to shift the vision toward growth.

Perhaps the best way to challenge that “cash now” philosophy is to identify an advocate on the board of directors interested in understanding the value of a vision focused on future growth. You can also bolster the case for a growth plan with sound research showing that changes in the economy will make it increasingly difficult to maintain the current level of payout if the business continues to operate with the status quo.

Proving the Negative

These discussions often end up with the growth advocate having to prove a negative about a choice the business must make. For instance, many companies spend millions of dollars on employee retention, marketing campaigns and other initiatives in hopes of creating internal and external value. Yet some still choose to leave. And leadership in favor of these initiatives often find themselves defending their "why."

We spend a lot of time helping our clients make similar choices on issues like cybersecurity. It’s hard to explain the value of a significant security upgrade to a board that hasn’t suffered through a major breach. On one hand, you could spend everything the business makes on cyber defense and borrow some money on top of that and a top-notch hacker might still find a weakness. Or you could roll the dice, spend little or nothing, and you might never make it onto a hacker’s radar. The CFO often has to find the balance between growth (protection of cyber systems and maintenance of the company’s reputation) and profitability (reducing cybersecurity costs).

Educate the Board

Well, really what we’re saying here is, convince the board. Once you identify an optimum balance point between growth and profitability, you’ll need leadership’s buy-in. The best practice here is to explain the spectrum of choices and detail the reasons that led you to conclude that the balance you are recommending is ideal. Anticipate some of the questions you are likely to get and have some numbers available to support your answers. Understand the point at which you will be asked to prove a negative and be ready to explain why that might not be entirely possible.

Funding growth is not something you do in isolation. The world continues to turn as you work to figure out which growth plans to fund and which require more analysis. HORNE understands the struggles and obstacles that businesses face when trying to balance growth and profits, and we can help you explore options and support your conclusions.

 

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THIS POST WAS WRITTEN BY Joe Green

Joe Green serves as an assurance partner at HORNE LLP. With a strong background in areas that impact publicly traded and middle market companies, he is dedicated to working alongside clients to manage deadlines and stressful situations for them, so they can focus on their future. Joe’s specialized experience includes transaction accounting, tax issues and issues associated with equity transactions.

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