Profitability leads to growth

Turn Profitability into Growth

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Ben Mossman, Director – External Practice Development with Waddell & Reed

Great Practice Solutions


Pretend your business is a publicly-traded company, and you post profits and growth figures on a quarterly basis. If you repeatedly reported low profit numbers each quarter, you would expect equity investments into your company to decline, right? Not necessarily. Amazon regularly posts low profitability numbers and their stock price keeps rising. If they aren’t focused on it, why should you?

If you simply looked at the numbers, you might surmise that Jeff Bezos, CEO and President of Amazon, primarily cares about sales, not profitability. Although the profits may not wow Wall Street analysts, there is no doubt Bezos understands which endeavors are profitable and which aren’t. But we all know posting profits and generating profits are two different things. Amazon has made a practice of reinvesting profits back into the business. They double down on efforts to deliver promises to clients at a faster rate -- which costs money. This also results in lower reported numbers, but profitability is still a focus. You could make the point that this has led directly to the growth figures you see from the behemoth.

While your business is very different from Amazon, in this way it should be the same.

If you don’t understand profitability within your business, you may find it difficult to maintain organic growth. You could even be engaging in activities that pull back against progress, like swimming upstream. By doing so, you cost yourself time, money and resources. Additionally, you may find it difficult to understand how much can or should be reinvested back into your business to help achieve your growth targets. So, how can understanding profitability lead to growth?

1. Know what a profitable household looks like

Pay attention to what the numbers are telling you. From here, you can effectively analyze your client base to define those who are profitable and those who aren’t. Understanding this number can help you decide which behavior (marketing, client service, etc.) you need to start, stop or change.

2. Be honest about growth

To truly achieve growth, you must be honest about it. Although the positive rate of return on your clients’ portfolios can lead to revenue growth, is this really growth of your business? Understanding profitability can lead to activities that drive organic growth by focusing on investment volume and the RIGHT type of clients added.

3. Reinvest back into your business

Client experience. Additional training for team members. Office enhancements. Technology enhancements. Practice acquisition. Branding. Marketing. Client Experience (said it twice, I know). All of these can lead to growth in your business, and they all cost money. Understanding profitable behavior and reinvesting back into the business leads to growth.

 

What are your numbers saying?

Our Great Practice Solutions program can help you better understand your numbers, what they're telling you and how this knowledge may lead to growth

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References to specific securities are for illustrative purposes only and should not be interpreted as recommendation to purchase or sell such securities. This communication is provided for informational and educational purposes only. Investing involves risk and the potential to lose principal.