profit money water plant tree grow business

One of Warren Buffett’s most famous quotes is: “Only when the tide goes out do you learn who has been swimming naked.” In the current market environment with high inflation, increasing interest rates and low funding, the proverbial tide is receding.

It makes profitability an even more fundamental part of business.

It’s important to make the point given that over the last five to 10 years, ‘profitability’ seemed to become a taboo word, and fundraising was the hot topic. I started questioning myself: are we even a challenger brand if we’re not raising investment? Are we missing out on something?

But if you look at most successful businesses, they have one thing in common: profitability. To use another quote: “Nobody went bust making a profit.” I know this can be interpreted in many ways from different sectors and businesses, but fundamentally the point stands.

In the past few years, with aggressive funding from venture capitalists, the focus on growth with massive expenditure and low ROI had overtaken the focus on long-term profitability. Visiting entrepreneurs want to raise capital, do a quick exit and then let someone else deal with the problems. This isn’t a proven model, and personally I believe this narrows the options and chances of success.

Nowadays, every headline has changed from “X company has raised Y amount” to “X company has established a route to profitability”. Even companies that are based on loss-making models in their initial years will be – or should be – highlighting their route to profit.

As Ordo became profitable in its second year, I was told that bringing up our profitability in conversation was not advised, as this would make partners believe we had disposable money to burn and were not concentrating on growth. That’s crazy!

Showing profitability has been key for landing our strategic partners, both large and small. Most partners will be thinking: is this business sustainable, or is it another fad that will be here today and gone tomorrow, grown artificially by an overinflated valuation?

Profitability is also key for suppliers, giving them confidence in the business and payments. For example, this has enabled us to get better terms and credit with all our manufacturers and suppliers.

Profitable startups have another key advantage, as they won’t have to seek outside funding – or at least, considerably less – to continue growth, product development and team expansion. It also helps with low dilution while raising capital, which is a bonus for any founder. While raising capital, if you can show you need less capital and are profitable, the valuation is higher and capital requirement is lower.

Not only does profitability become forefront for partners and potential investors, but also employees. As a profitable business with financial stability, this allows you to pay it forward by ensuring employees feel secure in their employment, and in the current market environment with job cuts becoming common, it’s natural for employees to question.

I understand raising investment is key to building new businesses, and funding can be fundamental, especially for challenger brands. But the days of fast, non-profitable growth with a big cash payday are reserved for certain types of businesses, predominantly outside of fmcg.

In essence, profits signal good financial health and viability of a business. If things get tough due to changing consumer trends, increased competition, higher supply costs or larger economic concerns, as seen in our current climate, a profitable business has the financial resources to get ahead of others.

To add to Warren Buffett’s words: if the tide is an easy funding environment, being profitable is like wearing a swimsuit.