Topline Growth is NOT the place to FOCUS
By Alan Miklofsky | Wednesday, June 26, 2024
In today's business environment, many companies emphasize topline growth, often at the expense of bottom line profitability. However, a relentless focus on increasing revenue without a corresponding plan for profitability can lead to significant financial peril. This article argues that businesses should prioritize planning for bottom line profitability and work backwards, ensuring a sustainable and financially healthy growth trajectory.
Maurice Breton, the well-known veteran of the shoe industry, has recently co-authored an article titled, "Mastering the Shoe Show," which will be published soon. In that article, we state, "Make Data-Driven Decisions. The first thing you need to do is draft a plan to make the profit you deserve!"
The Allure of Topline Growth
Topline growth, which refers to an increase in gross sales or revenues, is often seen as a sign of business vitality and market success. It can attract investors, drive market share, and foster a sense of momentum within the organization. However, topline growth can be misleading if it does not directly translate into bottom line profitability — the net earnings after all expenses have been deducted.
The Pitfalls of Prioritizing Revenue Growth
Unsustainable Costs: Chasing revenue growth can lead to escalating costs. Companies may invest heavily in marketing, sales incentives, and expansion without adequate controls. This can erode profit margins and lead to financial instability. For example, companies like WeWork expanded rapidly without a clear path to profitability, leading to substantial financial losses and a valuation collapse.
Neglecting Operational Efficiency: When the focus is on revenue, operational efficiency often takes a back seat. Businesses may neglect cost controls, waste reduction, and process optimization, which are crucial for profitability. Operational inefficiencies can eat into profits and make the business vulnerable during economic downturns.
Debt Accumulation: To fuel growth, companies might take on significant debt. While this can boost short-term revenue, it increases financial risk and interest expenses. For instance, many tech startups raise substantial capital through debt financing to scale rapidly, but without a clear path to profitability, they struggle to service their debt.
The Case for Bottom Line Profitability
Sustainability and Resilience: A focus on profitability ensures that a company can sustain its operations and weather economic fluctuations. Companies that prioritize profit over revenue are better positioned to handle market volatility and unexpected disruptions. This was evident during the COVID-19 pandemic, where companies with strong bottom lines were more resilient and adaptable.
Investor Confidence: Investors are increasingly scrutinizing not just revenue growth but also profitability metrics. Profitability indicates efficient management and long-term viability. For example, Warren Buffett's investment strategy emphasizes companies with strong, predictable earnings over those with merely high revenue growth.
Value Creation: Ultimately, profitability is about value creation for shareholders and stakeholders. Businesses that generate profits can reinvest in innovation, reward employees, and provide returns to investors. Companies like Apple and Microsoft have consistently demonstrated that profitable growth creates enduring value.
Planning for Profitability
To shift focus from topline growth to bottom line profitability, businesses should adopt a strategic approach:
Set Clear Profitability Goals: Establish specific, measurable targets for profit margins and net income. Align all business activities towards achieving these goals.
Cost Management: Implement rigorous cost management practices. Regularly review and optimize expenses to ensure that spending contributes to profitability.
Operational Efficiency: Invest in technologies and processes that enhance operational efficiency. Streamline workflows, reduce waste, and improve productivity.
Balanced Growth Strategy: Pursue balanced growth by evaluating both revenue potential and cost implications. Focus on markets and products that offer profitable growth opportunities.
Monitor Financial Health: Regularly monitor financial performance using key profitability metrics such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and net profit margin. Use these metrics to guide strategic decisions.
Conclusion
While topline growth can create excitement and perceived market dominance, it is bottom line profitability that ensures long-term success and sustainability. By planning for profitability and working backwards, businesses can build a strong financial foundation, create value for stakeholders, and achieve sustainable growth. In the end, profitability should be the true measure of a company's success.
Once you accept my argument that a retailer’s goals for growth needs to be established in several different places within the financial reports and future goals for your business, you might be open to a future argument I’ll be making soon; that you need to also focus on improving traffic to your location.
Copyright Notice
© 2024 Alan Miklofsky. All rights reserved.
This article and the ideas contained herein are the intellectual property of Alan Miklofsky. Unauthorized use or reproduction of this material or any part thereof is strictly prohibited without the prior written consent of Alan Miklofsky.
References
"The Rise and Fall of WeWork," Forbes,
"Why Operational Efficiency is Important," Harvard Business Review
"Startups and the Perils of Debt Financing," TechCrunch,
"The Impact of COVID-19 on Business Resilience," McKinsey & Company,
"Warren Buffett's Investment Philosophy," Investopedia,
"How Apple and Microsoft Drive Profitability," The Wall Street Journal,
Alan Miklofsky is a business analyst and consultant with many years of experience in corporate strategy and financial planning. His experiences includes a 29 year tenure as a former member and two term Chairperson of the board of directors of the National Shoe Retailers Association. He also has wholesale experience in the shoe industry combined with experience in real estate, marketing, and other business segments assist him in his endeavor to bring continued value to the community of independent shoe retailers and their suppliers. He is a consistent contributor to Footwear Insight magazine and a top contributor to meaningful content to Shoe Dogs United’s Facebook group.
Alan Miklofsky, Professional Business Consultant
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