At first thought, most people think that profits are the most important part of a business. Most believe this is true for a small business or a large corporation. While this is true, it is not always the case. In fact, depending on the situation, revenue growth is more important than profits. Here are three reasons why some believe this is the case.
Expanding market share:
Most people who want to make profits in the long-term will want to expand market share. This is true whether in retail or financial services. In trying to gain market share and new customers, smart entrepreneurs swill sacrifice short-term glory for long-term profits. When doing so, one can see the money roll in if they do not mind waiting a few years for advertising campaigns to pay off and work their magic. Remember, when looking at large corporations, one will notice a trend; larger companies often went years without making a profit. Of course, this is also true for small companies as they will want to invest in infrastructure such as a merchant account to accept credit card payments. Remember, one should not feel guilty when profits drop while they are growing revenue.
Slow and steady:
To make a profit, one will need to bring in more money than they spent. This is extremely difficult at first as most small business owners will not take in a lot of payments. This is okay as it is wise to start slowly and build a solid customer base who returns often. In fact, when looking at a profitable entity, it probably had a few lean years where the owner spent time building the business and not worrying about the next quarter.
All too often, an investor will think of the next earnings day or significant catalyst. This is not the smart way to approach investing as people like Warrant Buffet can attest. No, one should think of the long-term trend of a business. his will allow one to ignore the short-term noise which does not mean much. Simply put, to attain profits in the long run, one must follow the trends and avoid worrying about taking a small loss in the first year or two.
Some think it is counter intuitive to ignore profits. However, when taking a longer view of things, one should worry about revenue growth as this tells the deeper story to an investor.