How important is profit?

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When you’re learning your first concepts of business as a youngster, you’re told that the purpose of a business is to make profit. If a business is not profitable, then it’s not viable in the long-term. However, more and more, profit seems to be falling down the agenda for assessing a successful business. So just how important is profit these days?

An old-fashioned idea

In the interviews episode of last year’s series of The Apprentice, one candidate pitched a business that would get big and get lots of attention very quickly by marketing fashion via influencers and minor celebrities on social media. She told the interviewers that she had done it before, and had succeeded.

Unfortunately, her definition of ‘success’ didn’t match up with that of the likes of Claude Littner. Although she had got the marketing and the revenue, the business – in her words – “didn’t work” operationally. Costs got out of control and cash was drained out. Yet, she still believed that her first business had been a success.

As the interviewers told her that an unprofitable, collapsed business probably shouldn’t be described as a success story, there was a sense that this was an almost old-fashioned view. To them, a business failure was, above all else, a failure. To be learned from, sure. But not something you should go on TV shouting about in an excitable fashion.

Failing is good

An article from The Guardian last week on venture capitalists quoted one entrepreneur – Philip Storey – who recognised a growing acceptance of failure in the business world: “There’s a lot of talk in the startup world about the benefits of failure – fail hard, fail fast, that kind of idea”. A lot of successful entrepreneurs – not least Richard Branson – talk often about how they have recovered from set backs, and talked openly about business failures.

Although the principle is good, the outcome seems to have been an acceptance of failure as part of the ‘career’ of an entrepreneur. Naturally, the fact that a business makes profit therefore becomes less important.

Get Big, Quickly

The “fail hard, fail fast” idea is derivative of another trend in business: that growth and scale-up is more important than profitability. Last year, we picked up on Dan Lyons’ point in his book about Hubspot, that there are many tech firms that are only interested in getting as big as possible as quickly as possible and being floated before anyone realises that the profit isn’t appearing. These are so-called “unicorns”, as described in The Guardian article, businesses that get to a $1 billion valuation very quickly. The “fail hard, fail fast” idea is derived from this wish from investors to find the next ‘unicorn’. They need to know quickly whether a business can be scaled up fast. If it’s only going to be a ‘cockroach’ – a “robust, sustainable business” – then that’s just not good enough.

Of course, these “robust, sustainable” businesses may not be profitable themselves. To some extent, profit has often been over-emphasised, especially in the early days of a business. A start-up that wishes to build a good project, to “get the idea right”, and invest back into the business may make small profits or even be loss-making in its early years. Clues to viability and future success would then lie in revenue growth, the competitive advantage of the business, and the value in the idea.

Plus, profit can often be improved quite quickly by slashing costs and reducing overhead without regard to sustainability. Profit should never be the only metric by which we measure a business.

If it’s too good to be true …

The importance of profit would seem to depend upon the aspirations of the founder and the investors. If the objective is to get rich quickly, then profit matters less than revenue growth and generating a lot of buzz. If the aim to build a sustainable business based on solid foundations that will grow over time and deliver a quality product or service, then profit becomes a more important indicator of success.

As Storey highlights, these people need to either grow organically, or seek out the right investors. They should be aware of the motives and drivers behind their investors; whether they’re out for a quick buck and a bonus, or whether they care about their reputation and they’re looking for a sustained return over time. These people should perhaps be wary of anyone who tells them they will help them get back very quickly. If it’s too good to be true, it usually is.