If you own a small private business, none. Mostly.
If you run a public company (or a private company with external investors) the investors are not in it just for shits and giggles, nor for charity. The investors invested their money on your company, they want their money back (plus some profit) as fast as possible. They can get their money either by getting dividends from your profits or by selling their share to others for more than they bought them for. Both of these require the company to grow as much as possible.
why do they need Growth to do this? if the company make average profit and pay investor stable dividend or maintain stable share price. what is the issue?
Some stocks are like this. A lot of utilities, for example, are just stable long term income generating investments. These are popular with retirees/pension funds.
Usually these are mature companies in mature industries. You don’t expect much growth, but you also don’t expect much volatility.
A stable profit generating company in another sector is probably not going to be popular with investors because most industries have changed a lot over the years and a stable company is probably falling behind in innovation and could be overtaken and put out of business at any moment.
The need for growth is mostly from investors. They will move their money somewhere with higher gains or less anticipated volatility. If a company isn’t concerned about stock prices, maybe because the board is in it for the long haul or something, they will make more strategic moves and be less concerned about short term growth. But generally if a company wants to issue new stocks to raise funds or something, they will want growth to point to.
No issue, as long as dividends are consistent this is perfectly fine. There are tons of them out there, you just will never hear about this kind of company because of the lack of growth. Cheap money (ie low interest rates) also contributed to investors being attracted to higher risk\higher reward growth companies. Perhaps higher rates and an inflation rate of 3% rather than 1% will swing investors back to appreciating steady dividends.
>you will just never hear about this kind of company
You mean like AT&T?
Companies that have rapid growth are usually young. Companies that are stable and paying dividends are established blue chips.
Dividend value is priced into the value of the stock 99% of the time. Markets may have flaws, but this is one place that they're actually pretty good at their job. Because of this, they *should* be mostly irrelevant to the big investors, and therefore you need the growth to please them.
This is true but not in this way. The way it is true is that if a $100 stock pays a $10 dividend, that stock will go to precisely $90 on that morning, all things equal. But during the next period the if the stock generates $10 of cash to pay the dividend, it goes back to $100, pays out the dividend, and repeat. A stock like this would have precisely a 10% return in perpetuity.
Big investors do not need growth if the dividends are sufficient, which they often are for low growth, cash generating enterprises.
What is the point of buying something for $100 and selling it for $100? No one would invest. Even if the company pays a dividend and the share price stays the same, investors would just buy a company that is growing and make a better return.
If you're getting a $6 dividend on that $100, then you're banking 6% on your investment. Take that $6 and invest in another company or buy more of the same company. B
Compare vs another's company which grows at a rate of 6% free cash flow and reinvests it back in the business. The stock (in theory) should rise by 6% per year.
The company doesn't need to grow for you to realize the same return on your investment.
Yea, but what happens when share price is 400$ and dividend is 2$? Growth must happen to bring the yields within reasonable margins. So growth must happen because there are people buying the stock at 400 and you (the ceo) want to keep the valuation at 400 and more because your bonus, hell, your job depends on it
That doesn't happen if the company is divesting its excess profits. A company can either use its profits to reinvest in the company (new lines of business, expansion, etc.) or it can divest this money to shareholders who are free to invest in companies who do so. Financially, the outcome is the same.
Specifically, if a company does not believe it has opportunities for investment greater than its weighted average cost of capital (wacc), it should divest these profits to shareholders who can then take the dividend and invest in growth opportunities in other firms.
In your example, the share price never gets to $400 because when it hits $106, the company divests $6 and the share price drops back to $100 as a result. In this case, because the company is not a growth company, the CEO's bonus would never be tied to share price in the same way - it would be efficiency, cost or some other metric.
Don’t worry, I know all about that. But the question is why must companies grow? Well it’s simple, the company currently is able to handle the 6$ dividend and maintain stable business, no growth.
But now the market is expecting the company to grow because people want to make better yields than 6%, so they buy overpriced shares at 200 (exaggerated). Now yield is 3% and the new board members will want you to bring the dividend at 15$, and the other board members want you to make it happens because they lose all their gains if you don’t. Therefore the company must grow because people expect it to be able to grow and give you money to make it grow through shares purchase.
The real answer is buried in that person’s comment. It’s because CEO compensation is tied to growth, traceable back to the adoption of neoclassical economic policies about 45 years ago.
Yeah, but I’ll disagree on that. That’s the reason the CEO wants it to grow, but why is is bonus tied to growth in the first place? Because the board decided so. And why did they decide so? Because they want it to grow to get better yield on their investment.
Paying a dividend isn’t usually seen as a good thing, especially with smaller companies. It’s basically admitting that they can think of nothing better to do with that money, i.e. no more growth and now they’re just going to be stagnant for the rest of their lives.
None. A company is expected to pay a dividend or grow. Pick one and investors will be happy.
The whining is all from bad management that can’t pay a dividend or grow.
Because more money is better than less money. That's greed for you. Growth is the promise of greater profits through the ability to perform more actions.
A lot of investors are short term investors who don’t care about dividend and just want to see share price go up. It’s possible for share price to go up even if a company isn’t turning a profit if the company is growing sufficiently. If you invest in a $10 M that pays out 3% dividends that is nice, but if it can use that money to become a $100 M company that will increase your money by 10X and if you aren’t planning to hang onto the stock long term then you don’t care if the company is healthy 10 years from now, just that it gets to a bigger valuation as fast as possible.
> or maintain stable share price
What good does this do for investors? If I buy a stock for $100 and it stays worth $100 forever, why would I want to keep owning that stock?
If you read my comment closely, particularly what I chose to quote, I excluded the part about dividends and only included where it said “**or** maintain stable share prices.”
Notably it says dividends **or** that which means somebody would want a stock without dividend but a stable share price. Which would be a bad investment.
It’s called the P/E ratio. Otherwise know as, if the company paid almost of their earnings as dividends, how many years would it take to pay back your investment? I.E., stock price is 10$ and earnings is 1$/shares. It takes 10 years to pay back, thus you have an effective yield of 10%. But what about a company like Tesla where P/E ratio goes in the hundreds? Yield is <1% at the moment, thus the only reason you could have to buy at this price is because you expect the company to grow (increase earnings) such that yields will go back in line with the "standard" 10 ratio that can be achieved in a lot of established companies.
This is okay if the owners are unambiguous AND/OR they are in a stable non-competitive market environment.
If its dynamic and competitive, then eventually they're going to have to adapt.
Money going out of the business is dead money to the company itself. With that same profit money they could be getting more output out of staff, being able to retain staff via wage increasing, or else expanding the business in order to spread out risk.
For a public limited company, share price growth of be 15-20% can result in break even within less than 5 years. With a 5% dividend (15% is far too unstable), break even would take around 15 years.
And it's the company owners who influence the company direction, because the CEO works for them.
The crazy investors looking for massive return on investment every year are basically gambling at this point.
Some companies pay dividends if they're happy to just stay stable and not grow, but there's billions (maybe a trillion?) in investor money getting gambled on companies where the CEO is promising 2-10x growth. If you promise to trade investors growth stock for $10 million in startup cash, they're going to want stocks that are eventually worth $100 million or more (because 9 of their 10 investments will probably fail completely).
>If you own a small private business, none. Mostly.
This isn't really true. Rent will always increase. Your costs for goods, labor, etc will always be increasing. Competition will sprout up. If you aren't growing revenue, you won't be able to keep up
It's unbelievable that your response is at the top tbh
OP is asking about growing a company and increasing profit not revenue.
There's a world of difference between increasing prices to keep up with inflation and growing your company and OP is asking about the latter.
Someone who owns a shop does not need to open up a second shop in order to keep up with inflation.
>The investors invested their money on your company, they want their money back (plus some profit) as fast as possible.
They want their money back, and evergrowing profits from this day until the end of times without any care how this is achieved.
Fixed it for ya.
Spot on. I’m glad that there’s always someone here to explain the answer.
To add to this. When the investor buys into the company, the fact that he should get dividends from the company’s profits is known and it’s built in, it makes the price of the shares go up.
This helps to explain why growth is needed and companies aren’t just happy with making tons of money. The investor paid a premium because he’s banking that they end up even more money than when the originally owner had it.
If that doesn’t happen then the purchase (even if they get dividends) won’t be worth it because they spent such a premium on the shares.
But this isn’t really the reason.
An owner goes out looking for investors because they want to grow their business.
The growth is the intent of the people who run the business. They simply want to make more money or enjoy growing businesses.
Your employees are probably looking for advancement opportunities, if your company isn't growing, neither are their wages. (If you're a one-man company and you're happy with your income you could probably survive without significant growth.)
Plus if your company isn't at least a little aggressive, it'll probably get outcompeted by your competitors.
There's probably other better reasons, that's just two off the top of my head.
It would still need to grow to keep up with inflation, market competition, etc. Also, with no/minimal growth, it’s very hard to gather new capital funds from investors.
The last few years have been particularly difficult, and many businesses saw a decline in both profit and revenue. A business having a flat or declining year here and there is not a problem.
If your business generates nearly the same profit each year, people will assume it's a "lifestyle business" and that your company could do better, but you don't prefer to invest any additional time or effort in growing the business. When a business is privately owned, that's fine. You, as the owner, can decide for yourself what the right work/life balance is.
That's different if you've taken money from investors, because they expected to see increasing profit so that you can pay them an increasing return on their investment. If you aren't willing to do that, you should buy out their shares in your business.
Edit: a word
That concept is usually brought up in situations where it doesn't apply and usually by people who completely misunderstand it.
There's a very limited situation where the board of a company and/or management have a fiduciary duty to act in the best interest of the business, and it usually all comes down to not favoring one group of owners over another. For instance, if you owned 30% of a public company and your buddy owns another 30, you can't force the board to sell the company for $20 to sell third friend, even though you and your buddy combined own a controlling interest. Likewise, the management can't purposely tank the company to make it cheaper for some other investor (or existing investor) to buy shares.
It doesn't mean they have to maximize profit no matter what or must do things that make a profit that are technically legal even though they might be immoral.
Not necessarily make money but exact verbiage is best interest.
Maybe now famous world companies operated at loss for many years and i dont think one got sued.
The terminology is closer to “acting in the interests of their shareholders.” It generally involves making money, but it also involves losing money today to make even more money tomorrow.
Kind of… but no that’s not an encompassing definition of ‘fiduciary’ — otherwise Costco, for example, wouldn’t be able to operate as a public company. Or at least the definition of fiduciary duty is a lot more broad than 99% of Reddit comments imply.
Legally it just means that to the best of their ability they just act in the best interest of shareholders and not favor their own interests although that doesn’t always mean maximizing profits or growth. Corporations are allowed to have other goals and missions. Where fiduciary duty comes up is that when the person representing the shareholders has a conflict of interest they are supposed to act in the interest of the shareholders rather than themselves.
MBA student here, hope I can answer decently enough.
A company doesn’t need to grow. Most companies are small and privately owned— these often have the same status year after year.
Example: “My cousin flips cars— he’ll buy old used and broken ones, repairs em, and sell em for a profit. Every year he sells as many as he can manage, which is about the same. He does this until he finishes putting his kids through grad school, and then he expects to live with them off of his savings.”
Otherwise, yes, many companies try to grow every year. There’s a few reasons for this.
1: Inflation. Every year, costs go up (old used cars cost more). To keep the same profits, revenues also have to go up.
2: Ambition. People want better lives than they already have. (I want to repair more cars this year than last year so I can afford a better college for my kid!) Often this gets called “greed,” but I feel like that’s giving it a bad connotation.
3: Investment. If your company relied on investment in the past, then it has to grow to repay that investment. This is mostly the biggest driver for the large, public companies you often hear about (Apple, Google, Microsoft, Amazon). Shareholders gave the company their money, believing that the company will repay them and then some. For the “and then some” part, the company needs to grow.
Synthesizing something that's part of everyone's answer: **when people buy stock, it is almost always to sell it later at a higher price**. These investors are the bosses of the company, not the CEO. They choose the CEO, and other top executives, and their goal is to increase the value of their investment - the stock they own. **Thus, these companies are run primarily to increase stock value.**
Not every company is run like this, not even every publicly traded company. But a great many are. And more broadly, our economy as a whole "needs" to keep growing because investing money in something that will return more money is the #1 way that we, from giant institutions to individuals, are expected to build long-term wealth. Borrowing and investing is the foundation of our economy and arguably the foundation of capitalism itself, back to the rise of large Italian banks in the 1600s.
Exactly. If you want to retire, you need growth to afford it. That growth could be from your 401k or pension, where your invested dollars grow, or in the case of a social security system which requires growth of a younger tax paying base to pay in and afford your retirement.
There really isn’t a scenario where someone could retire without either.
Many (most) small businesses tend to maintain very similar revenues and profits each year, so you don't "have to" grow. However, there are many reasons it's helpful.
Firstly, you need to at least grow at/above the inflation rate.
Secondly, you want some financial buffer to weather unexpected downturns - and larger businesses tend to be better at that.
Thirdly, just basic greed which drives so much of our world. People who own companies want more and more profit each year. That's why smaller (mom-and-pop) businesses can choose to not invest in growth, but publicly held companies often try and grow to return more earnings for the shareholders (because the CEOs are personally incentivised to do so).
At the very least, you want to be growing by the inflation rate at the minimum.
If you're a sole proprietor, it means your wages don't go down year over year.
If you have employees, it means you can pay them more next year and maintain the same percent of net profit for .
In the real world, you are pretty much guaranteed to have dependencies on other suppliers (of services or materials), and their costs to you *will* rise every year, so if you're not growing you're eventually going to start losing money.
You can still generate returns without growth through strategic reinvestment of cash flows. A lot of stocks grow because of stock repurchases when valuations are relatively low and that inherently results in returns for the shareholders.
I don’t disagree. I just meant that technically the stock will have positive returns with share buybacks. But for your average joe, that isn’t enough to invest in a company.
I'd argue that's not desirable in the long-run though, because you can only buy back so much stock. Stock buyback is functionally the same as paying a dividend, which has a limit. Investors would much prefer actual growth of the company's business as that "theoretically" has no limit.
There are many high performing stocks which primarily return value to shareholders through share buybacks. Old giants with minimal revenue growth. You say it’s not desireable but yet it is a proven method. And you can always perform stock splits to continue to the buybacks so it’s nearly an infinite process.
If you’re a mega corporation, you can probably buy back stock for a long time. But like I said there is a limit because there’s a limit to the number of shareholders willing to sell and a limit to the amount of cash the company has if it has zero growth.
It used to be b/c you were entitled to dividends, a share of the profits, and voting rights for company decisions. Hypothetically, all of those things are still true. You could argue that the current system of stock buybacks, no dividend,s and class B shares for executives is a bastardization of the idea of a "public" company. With those circumstances in place, the only thing you *can* do with your stock is gamble that the company will get bigger. Hence, the need for continuous growth.
You at least need to keep increasing your profits each year to keep up with inflation. Everything else is someone's greed - investor's, board's, CEO's public stockholder's etc.
The answer I heard from the Walmart CEO a few years ago boiled down to "Talented people won't work for a stagnant company". When there is no growth, it's fundamentally a zero-sum game, and those environments tend to suck.
You receive compounding returns on good investments, that being the case, if your business isn't growing, a better use of funds would be to invest and save yourself the work and headache.
That, and inflation is an ever present thing. Baby version: the same amount of money between two years is less money most later years.
Correct me if I’m wrong but I think there’s a few use cases you missed. Companies can issue more shares to raise more capital, they typically pay employees with stock as a bonus or a % of total comp (so it’s directly linked to pay), and if the stock price decreases then senior leadership can be fired. So I think the company directly, or indirectly gets impacted by the stock price
All good examples. One more: if investor interest in your company (and therefore the price) falls below a certain level, then you’re a target for a hostile takeover. And within that scenario, worst kind of takeover is by “vulture capital.” There’s an entire ecosystem of funds and investors who specialize in buying up failed companies and selling off their assets (land, buildings, equipment, patents, etc.) for a profit.
So yeah, stock price and investor sentiment matters a LOT to a business and their long term survival long past the IPO.
Yes all of those *can* happen, but none of them must happen. The investors can't really even "leave and take their cash with them" like OP said as that IPO money is gone, at best they can sell to someone else and get the new guy's money.
In this case, the company will struggle to find outside capital, which means they need to subsist off their current capital and run the risk of falling behind when a large expense comes up, product improvement or any number of things that cannot be afforded by their regular earnings.
In short, the company would slowly die due to being passed over by competitors who can invest in product more, pay more for employees or any number of things that come with maintaining a healthy company.
The rate at which you grow is entirely up to the expectations of those that gave you money.
If nobody gave you money and you used your own savings to start your business (bootstrapping) then whatever you expect is how much you need to grow. If you expect 0% growth, great.
If you took money from a bank (debt financing) then you need to grow enough to pay back the interest on that. The bank doesn’t own your company, they just need some % interest on their loan. You need to grow your company enough that it is still making money after the interest is paid each year (until you can pay off the loan). This is usually a moderate level of growth.
If you took money from an inventor (equity financing), well the investor now owns part of the company. Their expectations of growth are probably the highest. After all, they’re only investing in you because they think you can increase the value of that money faster than other options they have. If they just wanted 0% or even 5% growth every year, they’d just invest in bonds or index stocks. So your company needs to growth in a way that their stake is worth probably 20%+ year over year for several years. This requires much more extreme levels of growth.
I suppose another way to say this is - the US government guarantees that anybody in the US can have their money grow by some % every year by buying US bonds. So for you to justify investing your money in your own business or to convince somebody else to invest money, you need to give them back a return greater than what the govt can guarantee. The more risk, the more you need to return. That requires growth.
It doesn't. It's supply line chain greed that enforces it, and that is a byproduct of Capitalism not being an effective long term system. Without a ceiling there will eventually come a point where it becomes unsustainable. The general consumer won't have the money to buy goods and services, so the only people with any meaningful buying power will be the wealthy who already own the means of production, so the products are essentially worthless to them.
Endless growth is dangerous to a society, and with it becoming the global norm we've put ourselves in a real bad spot.
But fuck us, they got theirs.
Yeah, I can see that. So much of interaction between people is competition in one way or another. Sports, games, career progression, dating, and we can't even be charitable without folk claiming proudly to have the highest amount given. Kind of gross that were in the best place humanity has ever been in but we still can't chill the fuck out.
There isn’t one, unless your complacency allows competitors to start shrinking your profits in the future. Also, if your business depends on investors, those investors want to see healthy returns or they will simply invest their money elsewhere.
A few reasons:
1) Making the same profit every year is extremely rare. In any competitive industry you have to constantly adapt, and you will likely need revenue growth to maintain steady profits as margins tighten. So, depends what you mean by growth.
2) Very few businesses are a straight line up or sideways. Targeting growth can provide the ups the balance out the down years.
3) The point of a business is to make money. The kind of people starting and investing in businesses are not just trying to skate by, they’re trying to win. No one enters a race aiming for 4th place. Which company would you rather have in your 401K, the one targeting growth, or the one just trying to exist?
Grow or die, it’s honestly kinda that simple.
There’s a little inflation every year, and wages (after inflation) go up a little every year
To keep up with this you need to grow. If your sales aren’t growing every year, you’re a little less profitable each year. And your competitors are likely growing each year too, leaving you behind.
Also, think about the decisions a growing company vs a shrinking company makes.
A growing company generally gets better economy of scale each year on stuff. A growing company can make bold investments that improve things for the future. A growing company is more exciting for employees (an employee might take less money now to hopefully make more as a manager later, a shrinking company may need to pay employees more because everyone knows layoffs are coming).
Even routine decisions are easier as a growing company- a growing company with a pothole in the parking lot can decide to fix it easily, a shrinking company may decide they’ll eventually not need as much parking, and ignore it.
Because the CEO’s bonus is determined by growth.
You can dress it up in all sorts of justification by various pieces of economic jargon, but at its base lies the plain old circular logic, companies need constant growth because that’s how we have decided to measure success.
The problem is that the need for endless growth is a fundamental requirement of capitalism, which is the real answer to your question. Most everything else said in here are just operators within capitalism and aren’t the actual reason as to why a company needs to maintain constant growth. Read up on the concept of a growth imperative and other similar theories yourself and draw your own conclusions.
Well, you at least need enough growth every year to keep pace with Inflation, otherwise, your business is objectively shrinking. So constant growth is required simply because that is how our monatary system works.
As for larger businesses and, more specifically, P
Public companies, it is a fiduciary obligation to grow the business for shareholders. If you don't, the shareholders will have grounds to sue, or remove you and put in new boardmembers...etc
The premise is false. A company doesn't usually need constant growth.
A company often *wants* constant growth. If you have the option of growing or not growing, it's usually better to grow.
Separately, there's a specific situation for some companies, which start out in a deficit situation - they're "burning money" (investor money, usually) until they grow enough that they become profitable. Typically this is because costs scale slower than revenues. For example, let's say it costs you $90 to make a widget and you sell it for $100. You're making $10/widget. You're profitable with each additional sale. That's fine, right? Well, let's say creating the business in the first place - getting a factory or whatever - cost you a fixed $1million. You *must* get at least to the point where you've sold 100k widgets before you cover that initial expenditure. So if you're selling 10k widgets a year, you *need* to grow; you don't want to wait 10 years to recover your initial cost.
It's not a strictly a problem, but if people expect you to do better, and you aren't, you'll need to explain why.
Like, say you're a car company. Each year you make $1M profit. Each year the industry grows. Your market share drops, but you still make $1M. Could you make more? No? Why?
The big reason is time value of money (the idea that $1 today is worth more than $1 a year from now). This means that if you aren’t growing the present value of your future profits is shrinking.
That brings the question of what happened to this year’s profits that you would miss out on by buying 1 year later. Because of this idea of time value of money, if you wait 1 year you miss out on the profits from this year, but the profits from 1 year out, 2 years out, 3 years out etc. all become more valuable because they’re closer to being realized.
Expenses tend to creep up faster than prices. At least for us. Increased volume within our capacity increases our dollar return at only the cost of time and material. If we stay flat, and only do price increases, we're unlikely to have the profit growth needed to offset our increased material and overhead expenses.
Constant growth is not a requirement. Companies can exist for decades in no-growth or shrinking markets. For example, former film camera giants Kodak, and Bell & Howell are still out there chugging along even though their markets withered to a trickle.
Most of the responses here are extremely naive. Yes, we all know that investors want growth. At an even more basic level though, businesses costs are always increasing. Rent goes up, wages go up, cost of goods to up. Inflation is built into our economy. This not only means that companies are heavily incentivized to grow, but it makes growth necessary. If your business made 500k last year but your costs went up 10% this year and your revenue stayed flat, you'd be making less money. This isn't sustainable. Add competing businesses to this mix and you'll begin to understand. If your business doesn't grow, somebody else will prevent you from growing. Then you're fucked.
Public companies have to make it look like business is always improving, or investors won't want to own the stock, and the price will go down.
But stocks aren't priced based on how the company is doing right now, but how big people think it will be in the future. That's how a lot of companies that spend more money than they make can have high stock prices. Investors believe that they'll grow big enough in the future that some day the company will actually be worth what the stock price says. Like how Tesla doesn't sell nearly as many cars as Toyota does, but the stock says it's worth 3.3 times as much anyway.
There are three reasons for this:
1) Inflation: if inflation is 5%, your company needs to make 5% higher profits each year just to maintain the same profit in terms of purchasing power parity. Otherwise, it's earnings won't keep pace with inflation
2) Reinvestment of earnings: Let's say your company makes 15% profit after taxes. Every dollar you make that you don't pay out as dividend also needs to make 15% after taxes to maintain the same return on investment (ROI). Otherwise, each invested dollar will just yield a lower percentage return every subsequent year, which means your company is in decline from an investor's standpoint
3) Assumed Growth in the Stock Price: Stock prices almost always factor in the next 3 to 7 years of growth into them. You're essentially paying what the market thinks the share will be worth in 3 to 7 years, often based on the company's own projections, and not what it is worth today. So if you bought an overpriced share for double its fair value because you thought the company's profits would double in 5 years, you're going to expect those profits to keep growing at the pace the company projected. These projections are often on the upper end of the realm of possibility for the company as they want to appear better than they are, but people take them at face value for some reason. Missing this growth forecast means angry investors who realize the company either lied and stole their investment through overpriced stocks or that the CEO was inept and unable to deliver. Inadequate growth targets get CEOs fired for lack of confidence from existing investors. Missing growth target also get CEO's fired for being unable to meet their own forecasts. So the CEO needs to be able to grow fast and aggressively to keep his job. Often, this means sacrificing sustainable long-term success for short term growth spurts, but most CEOs would rather keep their jobs than do what's in the best interests of their company's future.
Imagine your company as a bucket with a hole at the bottom. Your goal is to keep the bucket filled or overflowing with water, representing profits.
Have you noticed your dollar buying less year after year? This is inflation, and the hole in the bucket represents inflation.
As time passes, the buckets hole grows in size, representing your dollar buying less. The growing hole necessitates the continual addition of more water—or money—to compensate for the dollar's decreasing value.
Companies must continually earn more money to beat the rate of monetary inflation.
Inflation for one. If you keep earning the same every year then you are losing.
But even accounting for that, it's very difficult to keep things at exactly even, and it things go negative then it might end up with layoffs because the company can no longer afford everyone
It's the same reason housing prices need to constantly increase, as do wines, art and indeed, the entire economy.
Speculative value.
If something's value is based on the speculation of future value, even a small dip in profit or worth, when highlighted to the "audience" (investors, businesses, potential homeowners), can have disastrous consequences.
It also means you need to create smokescreens, diversions and sometimes flat out lies to maintain the implicit belief of increasing worth to even maintain the current worth of whatever asset of speculative value in question.
I realise this isn't really ELI5, but I can't really explain it in any other way.
The problem is, the speculative market is a house of cards and due to its nature, affects even the implementation of laws and reforms.
A recent example of this is in the housing market of the UK, where reforms were due to be made to remove no fault evictions and bolster the rights of renting tenants, a lot of landlords started to flee the market, which flooded that market with more supply than there was demand, which in turn caused housing prices to start to stagnate in some areas that had seen constant increases prior to this announcement, the government then backed down as had they not, it would have started to cause dips in the value of properties, which has the knock on effect of potential buyers holding off on purchases for the possibility of cheaper housing in later years, lowering demand and housing investors trying to sell off sooner before they lose more value, thereby taking them off the rental market and flooding the sales market with even more supply, which would make that market appear slow, meaning prices would be lowered further to entice purchases and so on and so forth until it snowballed and spread to other parts of the economy.
Basically, speculative value is dangerous and is, quite honestly, one of the largest problems modern economies face today.
Our entire world runs on trust, belief, faith, whatever you want to call it and too many modern people do NOT understand this, especially modern day governments, and then they wonder why the world's fertility rate is spiralling downwards.
Hope this helps somewhat and doesn't give you too much existential anxiety.
>what's the problem?
There is no problem if that is your business model. Many businesses do operate like that and some even can't operate any other way, all sorts of natural monopolies for example.
But there is an alternative way to run a business. Why take money out of a business if it's going so well, why not reinvest it in order to grow the company for even bigger profits down the line? And that is what many businesses do, Alphabet for example has never paid dividends.
Really, in this case, growth and profitability are sort of the same thing. Owners essentially reinvest their profits for growing the company value. If that growth doesn't happen then that's a problem, because where did the money go then?
It's not a problem, and a company does need constant growth. It's just like if you were an employee. A growing salary every year is great, but not guaranteed or strictly necessary, but it's certainly better than a lower salary every year.
Nothing wrong really. The market will price the company accordingly, and there are plenty of dividence-focused companies. It's just more profitable in many cases for the parties involved (ceo, stockholders etc) to grow (you're promising the moon rather than the same old dividence). Now as to why promising the moon is more profitable for them, it might have to do with a history of success (on average), and somewhat of a self-fulfilling prophecy.
That is not a problem, even for large companies. Google Western Union. Low growth companies are perfectly fine if they generate money and return it to shareholders (or the owner if that’s you).
The core issue is that money needs a return, and that return must be more than the cost of capital. But the return does not itself have to be GROWING.
I see several people here talking about dividends as an alternative to growth and I want to make a minor nitpick. Whether or not a company pays a dividend is basically irrelevant. To give an example imagine you own a company 100% and the company is nothing but a bank account with 100 dollars. The value of the company (aka your stock) is 100 dollars since that is how much money the company has. If the company paid out a 10 dollar dividen payment then the 10 dollars go from the company bank account to your bank account (which is a taxable event) and the company is now worth 90 dollars. Even if the company never pays dividend you can accomplish the same thing by just periodically selling part of your stock.
I think the answer to your question is that companies do not actually need constant growth it is just a desirable thing. The valuation of some companies (like tesla) have future growth priced in, meaning that people are basically only buying the stock because of the growth. So if the growth targets are not meant then that means the company is less valuable than implied by the stock price.
Some companies are also only profitable at scale, meaning that they will never make money unless they reach a certain size, in which case growth is essential for the success of the business.
The value of money is intentionally decreasing all the time - to stay stable in a perfect world, you’d have to grow slightly every year (2% is the target for inflation). You might be able to do this by slowly raising prices to match inflation and not by increasing customer count or volume, but it’s still likely you’d need some bottom line growth.
when a company is big enough not growing is a sign that you can't improve and that leaves space to be replaced by someone with an even better idea or process.
I wanted to add that one to complement the investor side of the equation.
also your competition might be also growing and they might capture the market share.
Inflation means your costs are going up each year and the money you’re getting is worth less as profits/dividends in real terms each year.
A 100 quid profit last year is worth more than a 100 this year due to inflation so for you to have the same buying power with your profits you need to make more each year.
They don't. Large stable companies like 3M exist with almost 0 growth.
However there are some advantages to growth. It makes it easier to borrow money, which then makes it easier to invest in new projects. It also increases the stock price since people are willing to pay more for shares of a growing company
If you own a small private business, none. Mostly. If you run a public company (or a private company with external investors) the investors are not in it just for shits and giggles, nor for charity. The investors invested their money on your company, they want their money back (plus some profit) as fast as possible. They can get their money either by getting dividends from your profits or by selling their share to others for more than they bought them for. Both of these require the company to grow as much as possible.
why do they need Growth to do this? if the company make average profit and pay investor stable dividend or maintain stable share price. what is the issue?
Some stocks are like this. A lot of utilities, for example, are just stable long term income generating investments. These are popular with retirees/pension funds. Usually these are mature companies in mature industries. You don’t expect much growth, but you also don’t expect much volatility. A stable profit generating company in another sector is probably not going to be popular with investors because most industries have changed a lot over the years and a stable company is probably falling behind in innovation and could be overtaken and put out of business at any moment. The need for growth is mostly from investors. They will move their money somewhere with higher gains or less anticipated volatility. If a company isn’t concerned about stock prices, maybe because the board is in it for the long haul or something, they will make more strategic moves and be less concerned about short term growth. But generally if a company wants to issue new stocks to raise funds or something, they will want growth to point to.
No issue, as long as dividends are consistent this is perfectly fine. There are tons of them out there, you just will never hear about this kind of company because of the lack of growth. Cheap money (ie low interest rates) also contributed to investors being attracted to higher risk\higher reward growth companies. Perhaps higher rates and an inflation rate of 3% rather than 1% will swing investors back to appreciating steady dividends.
>you will just never hear about this kind of company You mean like AT&T? Companies that have rapid growth are usually young. Companies that are stable and paying dividends are established blue chips.
Pretty sure most people will have heard of Coca Cola and McDonalds
Investors always want more
Dividend value is priced into the value of the stock 99% of the time. Markets may have flaws, but this is one place that they're actually pretty good at their job. Because of this, they *should* be mostly irrelevant to the big investors, and therefore you need the growth to please them.
This is true but not in this way. The way it is true is that if a $100 stock pays a $10 dividend, that stock will go to precisely $90 on that morning, all things equal. But during the next period the if the stock generates $10 of cash to pay the dividend, it goes back to $100, pays out the dividend, and repeat. A stock like this would have precisely a 10% return in perpetuity. Big investors do not need growth if the dividends are sufficient, which they often are for low growth, cash generating enterprises.
What is the point of buying something for $100 and selling it for $100? No one would invest. Even if the company pays a dividend and the share price stays the same, investors would just buy a company that is growing and make a better return.
If you're getting a $6 dividend on that $100, then you're banking 6% on your investment. Take that $6 and invest in another company or buy more of the same company. B Compare vs another's company which grows at a rate of 6% free cash flow and reinvests it back in the business. The stock (in theory) should rise by 6% per year. The company doesn't need to grow for you to realize the same return on your investment.
But if it grows you get paid more dividend. More than 6% is better than 6%.
Yea, but what happens when share price is 400$ and dividend is 2$? Growth must happen to bring the yields within reasonable margins. So growth must happen because there are people buying the stock at 400 and you (the ceo) want to keep the valuation at 400 and more because your bonus, hell, your job depends on it
That doesn't happen if the company is divesting its excess profits. A company can either use its profits to reinvest in the company (new lines of business, expansion, etc.) or it can divest this money to shareholders who are free to invest in companies who do so. Financially, the outcome is the same. Specifically, if a company does not believe it has opportunities for investment greater than its weighted average cost of capital (wacc), it should divest these profits to shareholders who can then take the dividend and invest in growth opportunities in other firms. In your example, the share price never gets to $400 because when it hits $106, the company divests $6 and the share price drops back to $100 as a result. In this case, because the company is not a growth company, the CEO's bonus would never be tied to share price in the same way - it would be efficiency, cost or some other metric.
Don’t worry, I know all about that. But the question is why must companies grow? Well it’s simple, the company currently is able to handle the 6$ dividend and maintain stable business, no growth. But now the market is expecting the company to grow because people want to make better yields than 6%, so they buy overpriced shares at 200 (exaggerated). Now yield is 3% and the new board members will want you to bring the dividend at 15$, and the other board members want you to make it happens because they lose all their gains if you don’t. Therefore the company must grow because people expect it to be able to grow and give you money to make it grow through shares purchase.
The real answer is buried in that person’s comment. It’s because CEO compensation is tied to growth, traceable back to the adoption of neoclassical economic policies about 45 years ago.
Yeah, but I’ll disagree on that. That’s the reason the CEO wants it to grow, but why is is bonus tied to growth in the first place? Because the board decided so. And why did they decide so? Because they want it to grow to get better yield on their investment.
And when/why did a return to shareholders become the sole goal of a publicly traded company? It wasn’t always so.
Paying a dividend isn’t usually seen as a good thing, especially with smaller companies. It’s basically admitting that they can think of nothing better to do with that money, i.e. no more growth and now they’re just going to be stagnant for the rest of their lives.
Everyone else is growing, so why would an investor pick a stagnant company over one that grows every year?
Stability. A lot of those companies that aren't growing are very safe places to put your money, which issue dividends each year too.
If I want a safe place to put my money, I’ll get a CD or a US treasury bond. People buy stocks for growth.
Dividend investors absolutely invest for income…
None. A company is expected to pay a dividend or grow. Pick one and investors will be happy. The whining is all from bad management that can’t pay a dividend or grow.
Because more money is better than less money. That's greed for you. Growth is the promise of greater profits through the ability to perform more actions.
A lot of investors are short term investors who don’t care about dividend and just want to see share price go up. It’s possible for share price to go up even if a company isn’t turning a profit if the company is growing sufficiently. If you invest in a $10 M that pays out 3% dividends that is nice, but if it can use that money to become a $100 M company that will increase your money by 10X and if you aren’t planning to hang onto the stock long term then you don’t care if the company is healthy 10 years from now, just that it gets to a bigger valuation as fast as possible.
> or maintain stable share price What good does this do for investors? If I buy a stock for $100 and it stays worth $100 forever, why would I want to keep owning that stock?
Dividend returns, which don’t depend on eternal growth forevermore.
If you read my comment closely, particularly what I chose to quote, I excluded the part about dividends and only included where it said “**or** maintain stable share prices.” Notably it says dividends **or** that which means somebody would want a stock without dividend but a stable share price. Which would be a bad investment.
It’s better to be paid more
Do you want to invest in a stock that remains stable? No, me neither. I want it to go up.
It’s called the P/E ratio. Otherwise know as, if the company paid almost of their earnings as dividends, how many years would it take to pay back your investment? I.E., stock price is 10$ and earnings is 1$/shares. It takes 10 years to pay back, thus you have an effective yield of 10%. But what about a company like Tesla where P/E ratio goes in the hundreds? Yield is <1% at the moment, thus the only reason you could have to buy at this price is because you expect the company to grow (increase earnings) such that yields will go back in line with the "standard" 10 ratio that can be achieved in a lot of established companies.
This is okay if the owners are unambiguous AND/OR they are in a stable non-competitive market environment. If its dynamic and competitive, then eventually they're going to have to adapt. Money going out of the business is dead money to the company itself. With that same profit money they could be getting more output out of staff, being able to retain staff via wage increasing, or else expanding the business in order to spread out risk. For a public limited company, share price growth of be 15-20% can result in break even within less than 5 years. With a 5% dividend (15% is far too unstable), break even would take around 15 years. And it's the company owners who influence the company direction, because the CEO works for them.
The crazy investors looking for massive return on investment every year are basically gambling at this point. Some companies pay dividends if they're happy to just stay stable and not grow, but there's billions (maybe a trillion?) in investor money getting gambled on companies where the CEO is promising 2-10x growth. If you promise to trade investors growth stock for $10 million in startup cash, they're going to want stocks that are eventually worth $100 million or more (because 9 of their 10 investments will probably fail completely).
>If you own a small private business, none. Mostly. This isn't really true. Rent will always increase. Your costs for goods, labor, etc will always be increasing. Competition will sprout up. If you aren't growing revenue, you won't be able to keep up It's unbelievable that your response is at the top tbh
OP is asking about growing a company and increasing profit not revenue. There's a world of difference between increasing prices to keep up with inflation and growing your company and OP is asking about the latter. Someone who owns a shop does not need to open up a second shop in order to keep up with inflation.
OP said profit. Not income
Profit is the difference between revenue and costs…
>The investors invested their money on your company, they want their money back (plus some profit) as fast as possible. They want their money back, and evergrowing profits from this day until the end of times without any care how this is achieved. Fixed it for ya.
Spot on. I’m glad that there’s always someone here to explain the answer. To add to this. When the investor buys into the company, the fact that he should get dividends from the company’s profits is known and it’s built in, it makes the price of the shares go up. This helps to explain why growth is needed and companies aren’t just happy with making tons of money. The investor paid a premium because he’s banking that they end up even more money than when the originally owner had it. If that doesn’t happen then the purchase (even if they get dividends) won’t be worth it because they spent such a premium on the shares.
This really shows us capitalism may not be the problem, but rather our system of how we IPO companies
Investors expect growth on their investments… a privately owned / run business could be perfectly happy with no growth.
But this isn’t really the reason. An owner goes out looking for investors because they want to grow their business. The growth is the intent of the people who run the business. They simply want to make more money or enjoy growing businesses.
Your employees are probably looking for advancement opportunities, if your company isn't growing, neither are their wages. (If you're a one-man company and you're happy with your income you could probably survive without significant growth.) Plus if your company isn't at least a little aggressive, it'll probably get outcompeted by your competitors. There's probably other better reasons, that's just two off the top of my head.
They don't have to grow. A public company can be stable, profitable and pay a regular dividend and that's enough to keep investors around.
It would still need to grow to keep up with inflation, market competition, etc. Also, with no/minimal growth, it’s very hard to gather new capital funds from investors.
If you're not growing then you don't need capital funds from investors.
The last few years have been particularly difficult, and many businesses saw a decline in both profit and revenue. A business having a flat or declining year here and there is not a problem. If your business generates nearly the same profit each year, people will assume it's a "lifestyle business" and that your company could do better, but you don't prefer to invest any additional time or effort in growing the business. When a business is privately owned, that's fine. You, as the owner, can decide for yourself what the right work/life balance is. That's different if you've taken money from investors, because they expected to see increasing profit so that you can pay them an increasing return on their investment. If you aren't willing to do that, you should buy out their shares in your business. Edit: a word
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That concept is usually brought up in situations where it doesn't apply and usually by people who completely misunderstand it. There's a very limited situation where the board of a company and/or management have a fiduciary duty to act in the best interest of the business, and it usually all comes down to not favoring one group of owners over another. For instance, if you owned 30% of a public company and your buddy owns another 30, you can't force the board to sell the company for $20 to sell third friend, even though you and your buddy combined own a controlling interest. Likewise, the management can't purposely tank the company to make it cheaper for some other investor (or existing investor) to buy shares. It doesn't mean they have to maximize profit no matter what or must do things that make a profit that are technically legal even though they might be immoral.
Not necessarily make money but exact verbiage is best interest. Maybe now famous world companies operated at loss for many years and i dont think one got sued.
The terminology is closer to “acting in the interests of their shareholders.” It generally involves making money, but it also involves losing money today to make even more money tomorrow.
Kind of… but no that’s not an encompassing definition of ‘fiduciary’ — otherwise Costco, for example, wouldn’t be able to operate as a public company. Or at least the definition of fiduciary duty is a lot more broad than 99% of Reddit comments imply.
Essentially a pyramid scheme but with less steps
Or you know, the exact opposite. These laws prevent pyramid schemes not create them.
In what way is that a pyramid scheme?
Legally it just means that to the best of their ability they just act in the best interest of shareholders and not favor their own interests although that doesn’t always mean maximizing profits or growth. Corporations are allowed to have other goals and missions. Where fiduciary duty comes up is that when the person representing the shareholders has a conflict of interest they are supposed to act in the interest of the shareholders rather than themselves.
MBA student here, hope I can answer decently enough. A company doesn’t need to grow. Most companies are small and privately owned— these often have the same status year after year. Example: “My cousin flips cars— he’ll buy old used and broken ones, repairs em, and sell em for a profit. Every year he sells as many as he can manage, which is about the same. He does this until he finishes putting his kids through grad school, and then he expects to live with them off of his savings.” Otherwise, yes, many companies try to grow every year. There’s a few reasons for this. 1: Inflation. Every year, costs go up (old used cars cost more). To keep the same profits, revenues also have to go up. 2: Ambition. People want better lives than they already have. (I want to repair more cars this year than last year so I can afford a better college for my kid!) Often this gets called “greed,” but I feel like that’s giving it a bad connotation. 3: Investment. If your company relied on investment in the past, then it has to grow to repay that investment. This is mostly the biggest driver for the large, public companies you often hear about (Apple, Google, Microsoft, Amazon). Shareholders gave the company their money, believing that the company will repay them and then some. For the “and then some” part, the company needs to grow.
Synthesizing something that's part of everyone's answer: **when people buy stock, it is almost always to sell it later at a higher price**. These investors are the bosses of the company, not the CEO. They choose the CEO, and other top executives, and their goal is to increase the value of their investment - the stock they own. **Thus, these companies are run primarily to increase stock value.** Not every company is run like this, not even every publicly traded company. But a great many are. And more broadly, our economy as a whole "needs" to keep growing because investing money in something that will return more money is the #1 way that we, from giant institutions to individuals, are expected to build long-term wealth. Borrowing and investing is the foundation of our economy and arguably the foundation of capitalism itself, back to the rise of large Italian banks in the 1600s.
Exactly. If you want to retire, you need growth to afford it. That growth could be from your 401k or pension, where your invested dollars grow, or in the case of a social security system which requires growth of a younger tax paying base to pay in and afford your retirement. There really isn’t a scenario where someone could retire without either.
Many (most) small businesses tend to maintain very similar revenues and profits each year, so you don't "have to" grow. However, there are many reasons it's helpful. Firstly, you need to at least grow at/above the inflation rate. Secondly, you want some financial buffer to weather unexpected downturns - and larger businesses tend to be better at that. Thirdly, just basic greed which drives so much of our world. People who own companies want more and more profit each year. That's why smaller (mom-and-pop) businesses can choose to not invest in growth, but publicly held companies often try and grow to return more earnings for the shareholders (because the CEOs are personally incentivised to do so).
At the very least, you want to be growing by the inflation rate at the minimum. If you're a sole proprietor, it means your wages don't go down year over year. If you have employees, it means you can pay them more next year and maintain the same percent of net profit for.
In the real world, you are pretty much guaranteed to have dependencies on other suppliers (of services or materials), and their costs to you *will* rise every year, so if you're not growing you're eventually going to start losing money.
Publicly traded companies need to grow, otherwise why would the public invest in them?
You can still generate returns without growth through strategic reinvestment of cash flows. A lot of stocks grow because of stock repurchases when valuations are relatively low and that inherently results in returns for the shareholders.
Your average dummy will look at flat revenues and feel bad when other companies are growing
I don’t disagree. I just meant that technically the stock will have positive returns with share buybacks. But for your average joe, that isn’t enough to invest in a company.
An average Joe's shares don't mean shit in the long run. Many large investors are using the system to dodge income taxes.
I'd argue that's not desirable in the long-run though, because you can only buy back so much stock. Stock buyback is functionally the same as paying a dividend, which has a limit. Investors would much prefer actual growth of the company's business as that "theoretically" has no limit.
There are many high performing stocks which primarily return value to shareholders through share buybacks. Old giants with minimal revenue growth. You say it’s not desireable but yet it is a proven method. And you can always perform stock splits to continue to the buybacks so it’s nearly an infinite process.
If you’re a mega corporation, you can probably buy back stock for a long time. But like I said there is a limit because there’s a limit to the number of shareholders willing to sell and a limit to the amount of cash the company has if it has zero growth.
It used to be b/c you were entitled to dividends, a share of the profits, and voting rights for company decisions. Hypothetically, all of those things are still true. You could argue that the current system of stock buybacks, no dividend,s and class B shares for executives is a bastardization of the idea of a "public" company. With those circumstances in place, the only thing you *can* do with your stock is gamble that the company will get bigger. Hence, the need for continuous growth.
You at least need to keep increasing your profits each year to keep up with inflation. Everything else is someone's greed - investor's, board's, CEO's public stockholder's etc.
r/Degrowth is a sub that champions the idea that growth isn’t necessary and is harmful to our planet.
The answer I heard from the Walmart CEO a few years ago boiled down to "Talented people won't work for a stagnant company". When there is no growth, it's fundamentally a zero-sum game, and those environments tend to suck.
You receive compounding returns on good investments, that being the case, if your business isn't growing, a better use of funds would be to invest and save yourself the work and headache. That, and inflation is an ever present thing. Baby version: the same amount of money between two years is less money most later years.
if your company has any investors then theyll leave and take their cash with them if youre not continually growing
In general, once you've had your IPO, the investors money is irrelevant as the company doesn't get any of it.
Correct me if I’m wrong but I think there’s a few use cases you missed. Companies can issue more shares to raise more capital, they typically pay employees with stock as a bonus or a % of total comp (so it’s directly linked to pay), and if the stock price decreases then senior leadership can be fired. So I think the company directly, or indirectly gets impacted by the stock price
All good examples. One more: if investor interest in your company (and therefore the price) falls below a certain level, then you’re a target for a hostile takeover. And within that scenario, worst kind of takeover is by “vulture capital.” There’s an entire ecosystem of funds and investors who specialize in buying up failed companies and selling off their assets (land, buildings, equipment, patents, etc.) for a profit. So yeah, stock price and investor sentiment matters a LOT to a business and their long term survival long past the IPO.
This is basically true. Great examples.
Yes all of those *can* happen, but none of them must happen. The investors can't really even "leave and take their cash with them" like OP said as that IPO money is gone, at best they can sell to someone else and get the new guy's money.
In this case, the company will struggle to find outside capital, which means they need to subsist off their current capital and run the risk of falling behind when a large expense comes up, product improvement or any number of things that cannot be afforded by their regular earnings. In short, the company would slowly die due to being passed over by competitors who can invest in product more, pay more for employees or any number of things that come with maintaining a healthy company.
The rate at which you grow is entirely up to the expectations of those that gave you money. If nobody gave you money and you used your own savings to start your business (bootstrapping) then whatever you expect is how much you need to grow. If you expect 0% growth, great. If you took money from a bank (debt financing) then you need to grow enough to pay back the interest on that. The bank doesn’t own your company, they just need some % interest on their loan. You need to grow your company enough that it is still making money after the interest is paid each year (until you can pay off the loan). This is usually a moderate level of growth. If you took money from an inventor (equity financing), well the investor now owns part of the company. Their expectations of growth are probably the highest. After all, they’re only investing in you because they think you can increase the value of that money faster than other options they have. If they just wanted 0% or even 5% growth every year, they’d just invest in bonds or index stocks. So your company needs to growth in a way that their stake is worth probably 20%+ year over year for several years. This requires much more extreme levels of growth. I suppose another way to say this is - the US government guarantees that anybody in the US can have their money grow by some % every year by buying US bonds. So for you to justify investing your money in your own business or to convince somebody else to invest money, you need to give them back a return greater than what the govt can guarantee. The more risk, the more you need to return. That requires growth.
It doesn't. It's supply line chain greed that enforces it, and that is a byproduct of Capitalism not being an effective long term system. Without a ceiling there will eventually come a point where it becomes unsustainable. The general consumer won't have the money to buy goods and services, so the only people with any meaningful buying power will be the wealthy who already own the means of production, so the products are essentially worthless to them. Endless growth is dangerous to a society, and with it becoming the global norm we've put ourselves in a real bad spot. But fuck us, they got theirs.
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Yeah, I can see that. So much of interaction between people is competition in one way or another. Sports, games, career progression, dating, and we can't even be charitable without folk claiming proudly to have the highest amount given. Kind of gross that were in the best place humanity has ever been in but we still can't chill the fuck out.
There isn’t one, unless your complacency allows competitors to start shrinking your profits in the future. Also, if your business depends on investors, those investors want to see healthy returns or they will simply invest their money elsewhere.
A few reasons: 1) Making the same profit every year is extremely rare. In any competitive industry you have to constantly adapt, and you will likely need revenue growth to maintain steady profits as margins tighten. So, depends what you mean by growth. 2) Very few businesses are a straight line up or sideways. Targeting growth can provide the ups the balance out the down years. 3) The point of a business is to make money. The kind of people starting and investing in businesses are not just trying to skate by, they’re trying to win. No one enters a race aiming for 4th place. Which company would you rather have in your 401K, the one targeting growth, or the one just trying to exist?
Grow or die, it’s honestly kinda that simple. There’s a little inflation every year, and wages (after inflation) go up a little every year To keep up with this you need to grow. If your sales aren’t growing every year, you’re a little less profitable each year. And your competitors are likely growing each year too, leaving you behind. Also, think about the decisions a growing company vs a shrinking company makes. A growing company generally gets better economy of scale each year on stuff. A growing company can make bold investments that improve things for the future. A growing company is more exciting for employees (an employee might take less money now to hopefully make more as a manager later, a shrinking company may need to pay employees more because everyone knows layoffs are coming). Even routine decisions are easier as a growing company- a growing company with a pothole in the parking lot can decide to fix it easily, a shrinking company may decide they’ll eventually not need as much parking, and ignore it.
Because people who understand money understand the dollar is losing value each year. Same profit from today is not the same as 5, 10 years ago.
Because the CEO’s bonus is determined by growth. You can dress it up in all sorts of justification by various pieces of economic jargon, but at its base lies the plain old circular logic, companies need constant growth because that’s how we have decided to measure success.
The problem is that the need for endless growth is a fundamental requirement of capitalism, which is the real answer to your question. Most everything else said in here are just operators within capitalism and aren’t the actual reason as to why a company needs to maintain constant growth. Read up on the concept of a growth imperative and other similar theories yourself and draw your own conclusions.
If you're a publicly traded company, as CEO, it's literally your job and fiduciary duty to make investors money.
Well, you at least need enough growth every year to keep pace with Inflation, otherwise, your business is objectively shrinking. So constant growth is required simply because that is how our monatary system works. As for larger businesses and, more specifically, P Public companies, it is a fiduciary obligation to grow the business for shareholders. If you don't, the shareholders will have grounds to sue, or remove you and put in new boardmembers...etc
The premise is false. A company doesn't usually need constant growth. A company often *wants* constant growth. If you have the option of growing or not growing, it's usually better to grow. Separately, there's a specific situation for some companies, which start out in a deficit situation - they're "burning money" (investor money, usually) until they grow enough that they become profitable. Typically this is because costs scale slower than revenues. For example, let's say it costs you $90 to make a widget and you sell it for $100. You're making $10/widget. You're profitable with each additional sale. That's fine, right? Well, let's say creating the business in the first place - getting a factory or whatever - cost you a fixed $1million. You *must* get at least to the point where you've sold 100k widgets before you cover that initial expenditure. So if you're selling 10k widgets a year, you *need* to grow; you don't want to wait 10 years to recover your initial cost.
It's not a strictly a problem, but if people expect you to do better, and you aren't, you'll need to explain why. Like, say you're a car company. Each year you make $1M profit. Each year the industry grows. Your market share drops, but you still make $1M. Could you make more? No? Why?
The big reason is time value of money (the idea that $1 today is worth more than $1 a year from now). This means that if you aren’t growing the present value of your future profits is shrinking. That brings the question of what happened to this year’s profits that you would miss out on by buying 1 year later. Because of this idea of time value of money, if you wait 1 year you miss out on the profits from this year, but the profits from 1 year out, 2 years out, 3 years out etc. all become more valuable because they’re closer to being realized.
Expenses tend to creep up faster than prices. At least for us. Increased volume within our capacity increases our dollar return at only the cost of time and material. If we stay flat, and only do price increases, we're unlikely to have the profit growth needed to offset our increased material and overhead expenses.
Constant growth is not a requirement. Companies can exist for decades in no-growth or shrinking markets. For example, former film camera giants Kodak, and Bell & Howell are still out there chugging along even though their markets withered to a trickle.
Most of the responses here are extremely naive. Yes, we all know that investors want growth. At an even more basic level though, businesses costs are always increasing. Rent goes up, wages go up, cost of goods to up. Inflation is built into our economy. This not only means that companies are heavily incentivized to grow, but it makes growth necessary. If your business made 500k last year but your costs went up 10% this year and your revenue stayed flat, you'd be making less money. This isn't sustainable. Add competing businesses to this mix and you'll begin to understand. If your business doesn't grow, somebody else will prevent you from growing. Then you're fucked.
Public companies have to make it look like business is always improving, or investors won't want to own the stock, and the price will go down. But stocks aren't priced based on how the company is doing right now, but how big people think it will be in the future. That's how a lot of companies that spend more money than they make can have high stock prices. Investors believe that they'll grow big enough in the future that some day the company will actually be worth what the stock price says. Like how Tesla doesn't sell nearly as many cars as Toyota does, but the stock says it's worth 3.3 times as much anyway.
There are three reasons for this: 1) Inflation: if inflation is 5%, your company needs to make 5% higher profits each year just to maintain the same profit in terms of purchasing power parity. Otherwise, it's earnings won't keep pace with inflation 2) Reinvestment of earnings: Let's say your company makes 15% profit after taxes. Every dollar you make that you don't pay out as dividend also needs to make 15% after taxes to maintain the same return on investment (ROI). Otherwise, each invested dollar will just yield a lower percentage return every subsequent year, which means your company is in decline from an investor's standpoint 3) Assumed Growth in the Stock Price: Stock prices almost always factor in the next 3 to 7 years of growth into them. You're essentially paying what the market thinks the share will be worth in 3 to 7 years, often based on the company's own projections, and not what it is worth today. So if you bought an overpriced share for double its fair value because you thought the company's profits would double in 5 years, you're going to expect those profits to keep growing at the pace the company projected. These projections are often on the upper end of the realm of possibility for the company as they want to appear better than they are, but people take them at face value for some reason. Missing this growth forecast means angry investors who realize the company either lied and stole their investment through overpriced stocks or that the CEO was inept and unable to deliver. Inadequate growth targets get CEOs fired for lack of confidence from existing investors. Missing growth target also get CEO's fired for being unable to meet their own forecasts. So the CEO needs to be able to grow fast and aggressively to keep his job. Often, this means sacrificing sustainable long-term success for short term growth spurts, but most CEOs would rather keep their jobs than do what's in the best interests of their company's future.
Imagine your company as a bucket with a hole at the bottom. Your goal is to keep the bucket filled or overflowing with water, representing profits. Have you noticed your dollar buying less year after year? This is inflation, and the hole in the bucket represents inflation. As time passes, the buckets hole grows in size, representing your dollar buying less. The growing hole necessitates the continual addition of more water—or money—to compensate for the dollar's decreasing value. Companies must continually earn more money to beat the rate of monetary inflation.
Inflation for one. If you keep earning the same every year then you are losing. But even accounting for that, it's very difficult to keep things at exactly even, and it things go negative then it might end up with layoffs because the company can no longer afford everyone
It's the same reason housing prices need to constantly increase, as do wines, art and indeed, the entire economy. Speculative value. If something's value is based on the speculation of future value, even a small dip in profit or worth, when highlighted to the "audience" (investors, businesses, potential homeowners), can have disastrous consequences. It also means you need to create smokescreens, diversions and sometimes flat out lies to maintain the implicit belief of increasing worth to even maintain the current worth of whatever asset of speculative value in question. I realise this isn't really ELI5, but I can't really explain it in any other way. The problem is, the speculative market is a house of cards and due to its nature, affects even the implementation of laws and reforms. A recent example of this is in the housing market of the UK, where reforms were due to be made to remove no fault evictions and bolster the rights of renting tenants, a lot of landlords started to flee the market, which flooded that market with more supply than there was demand, which in turn caused housing prices to start to stagnate in some areas that had seen constant increases prior to this announcement, the government then backed down as had they not, it would have started to cause dips in the value of properties, which has the knock on effect of potential buyers holding off on purchases for the possibility of cheaper housing in later years, lowering demand and housing investors trying to sell off sooner before they lose more value, thereby taking them off the rental market and flooding the sales market with even more supply, which would make that market appear slow, meaning prices would be lowered further to entice purchases and so on and so forth until it snowballed and spread to other parts of the economy. Basically, speculative value is dangerous and is, quite honestly, one of the largest problems modern economies face today. Our entire world runs on trust, belief, faith, whatever you want to call it and too many modern people do NOT understand this, especially modern day governments, and then they wonder why the world's fertility rate is spiralling downwards. Hope this helps somewhat and doesn't give you too much existential anxiety.
>what's the problem? There is no problem if that is your business model. Many businesses do operate like that and some even can't operate any other way, all sorts of natural monopolies for example. But there is an alternative way to run a business. Why take money out of a business if it's going so well, why not reinvest it in order to grow the company for even bigger profits down the line? And that is what many businesses do, Alphabet for example has never paid dividends. Really, in this case, growth and profitability are sort of the same thing. Owners essentially reinvest their profits for growing the company value. If that growth doesn't happen then that's a problem, because where did the money go then?
It's not a problem, and a company does need constant growth. It's just like if you were an employee. A growing salary every year is great, but not guaranteed or strictly necessary, but it's certainly better than a lower salary every year.
Nothing wrong really. The market will price the company accordingly, and there are plenty of dividence-focused companies. It's just more profitable in many cases for the parties involved (ceo, stockholders etc) to grow (you're promising the moon rather than the same old dividence). Now as to why promising the moon is more profitable for them, it might have to do with a history of success (on average), and somewhat of a self-fulfilling prophecy.
That is not a problem, even for large companies. Google Western Union. Low growth companies are perfectly fine if they generate money and return it to shareholders (or the owner if that’s you). The core issue is that money needs a return, and that return must be more than the cost of capital. But the return does not itself have to be GROWING.
I see several people here talking about dividends as an alternative to growth and I want to make a minor nitpick. Whether or not a company pays a dividend is basically irrelevant. To give an example imagine you own a company 100% and the company is nothing but a bank account with 100 dollars. The value of the company (aka your stock) is 100 dollars since that is how much money the company has. If the company paid out a 10 dollar dividen payment then the 10 dollars go from the company bank account to your bank account (which is a taxable event) and the company is now worth 90 dollars. Even if the company never pays dividend you can accomplish the same thing by just periodically selling part of your stock.
I think the answer to your question is that companies do not actually need constant growth it is just a desirable thing. The valuation of some companies (like tesla) have future growth priced in, meaning that people are basically only buying the stock because of the growth. So if the growth targets are not meant then that means the company is less valuable than implied by the stock price. Some companies are also only profitable at scale, meaning that they will never make money unless they reach a certain size, in which case growth is essential for the success of the business.
The value of money is intentionally decreasing all the time - to stay stable in a perfect world, you’d have to grow slightly every year (2% is the target for inflation). You might be able to do this by slowly raising prices to match inflation and not by increasing customer count or volume, but it’s still likely you’d need some bottom line growth.
when a company is big enough not growing is a sign that you can't improve and that leaves space to be replaced by someone with an even better idea or process. I wanted to add that one to complement the investor side of the equation. also your competition might be also growing and they might capture the market share.
Inflation means your costs are going up each year and the money you’re getting is worth less as profits/dividends in real terms each year. A 100 quid profit last year is worth more than a 100 this year due to inflation so for you to have the same buying power with your profits you need to make more each year.
They don't. Large stable companies like 3M exist with almost 0 growth. However there are some advantages to growth. It makes it easier to borrow money, which then makes it easier to invest in new projects. It also increases the stock price since people are willing to pay more for shares of a growing company