Does Growing Your Business Mean Shrinking Profits?

In this video, Matt reviews a video that says you have to be okay with having no profit if you want to grow your business. Matt then tells us his thoughts.

There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!

Video Transcript: 

Business Advice Video:

It’s very difficult to grow and have a lot of profit. Don’t get me wrong, it can be done. I’m talking about serious growth. I’m talking about like my companies have averaged 500% growth every year for three to four years now. We have sacrifice profit for that. Thinking that you can grow really aggressively or scale whilst maintaining a really good profit – like this it’s why most super big fast-growing businesses will borrow money.

Matt’s Review:

I would generally agree. It’s difficult to get to a much larger size than a small business at the same profit margin than when you’re small. And the reason is because if the owner is doing a 

lot of the work, owners not on payroll or not paying themselves, and so a lot of things that get done appear not to have any cost if you’re looking at the profit & loss statement because the owners doing them. And so they look very profitable when they’re small. It’s just the owner’s time is substituting for the money. What happens is you get larger is you start to need more help. You need admin people, you need marketing people, you need customer service people, you need people doing the work. All those people cost money. Not only the whatever wages but also benefits, and insurance, and 401k’s, and just the hiring, and recruiting, and training, and turnover process. All of that costs money. And so it is very hard to maintain high growth and scale up with the same profits you had when you were small. Also if you’re in high growth mode you’re probably spending money on marketing. Whether that’s paid ads, or going to trade shows, or social media, or whatever else. So you’re investing money in two places that you 

hadn’t been investing in when you were very small and highly profitable. So I would agree that for most companies as you get larger your profit margin goes down. But if you had a 50% profit margin when you had 100,000 in revenue, and only a 25% profit margin when you have $1 million in revenue, you’re still making five times more dollars in that larger business even though you have a smaller profit margin. So it all works out in the end as long as you, you know, manage it well and make sure your profit margin doesn’t go to zero. At that point, you would have a problem.