[Blog] Your Business in the Balance

By Bradley Hamner

When you started your business, my guess is that you dreamed of one that gave you freedom and flexibility, along with annual growth and increasing profitability, so you can make more personally or reinvest back into the business. Right?

Well, as bootstrapped entrepreneurs, we don’t have the luxury of focusing solely on growth. We must balance growth and profitability. Every decision matters. It’s about finding the right mix between pushing for growth and ensuring you stay profitable.

Every year presents both challenges and opportunities. Some years, growth feels easy; other times (like right now, even) it’s much harder. The good news is that this challenge builds a healthier, more resilient business in the long run.

In the meantime, bootstrapped businesses must be smart with their resources. This means you can’t afford to waste money. You need to grow, but you also need to stay in the black. The Rule of 40 is your key to achieving this balance.

The Rule of 40 is simple. It’s a metric that helps you balance growth and profitability. If you add your profit margin to your year-over-year growth rate, the total should be 40% or more. For example, if your profit margin is 25% and your growth rate is 15%, you’re right on target.

This metric comes from the SaaS industry, where companies needed a way to grow fast but still make money. But it’s not just for the tech world anymore. Any business can use the Rule of 40 to make sure it is growing without losing money.

Pulled two ways

As a business owner, you want to grow. But growth costs money. It means you have to hire more people, spend more on marketing and invest in training. All of this can eat into your profits. Following the Rule of 40 helps you see if your growth is worth the cost.

I used to think that “growth equals profit,” but I came to realize that, actually, “growth eats profit.” How so?

Here’s the uncomfortable truth: Growth and profit often pull in opposite directions. When you grow fast, your profits might dip. That’s OK if it’s part of your plan. But if you’re not careful, you could end up with a business that’s growing but not making money. The Rule of 40 keeps you in check.

Think about when you want to grow your business: What do you do? Hire more people? Invest more in marketing? Likely even both, right?

But what if you adopt this formula and discover that your score is below 40? Don’t panic. It’s simply a sign you might need to make some changes. Here are a few ideas:

Cut costs: Look for areas where you can save money without hurting growth.

Focus on high-impact growth: Invest in the areas that give you the best return.

Increase efficiency: Streamline your operations to boost profit margins.

Let’s look at a real-life example, a business with the following numbers:

2020: Revenue: $350,000, Profit: $75,000

2021: Revenue: $375,000, Profit: $80,000

2022: Revenue: $425,000, Profit: $120,000

2023: Revenue: $510,000, Profit: $150,000

2024: Revenue: $575,000, Profit: $175,000

Here’s what the Rule of 40 looks like for this business:

2020-2021: Growth: 7.1%, Profit: 21.4%, Score: 28.5

2021-2022: Growth: 13.3%, Profit: 28.2%, Score: 41.5

2022-2023: Growth: 20%, Profit: 29.4%, Score: 49.4

2023-2024: Growth: 12.7%, Profit: 31.2%, Score: 43.9

2024 Projection: Growth: 12%, Profit: 30.4%, Score: 42.4

The business starts with a low score but improves over time, hitting green in later years. This shows the power of balancing growth with profitability and you can do this in your business as well.

Determining your target

The Rule of 40 works in insurance and financial services too, but with a twist. These industries have more predictable revenue, but profits (and growth) can be hit by rate changes and state insurance regulations. The focus should be on maintaining steady growth while keeping an eye on external factors.

So, what should you “shoot for” in the insurance business? Depending where you are in the life cycle of your business matters a lot. If you have a more mature business, 15% year-over-year compound growth is a great target. For someone earlier in their career, they will likely be pushing to grow more.

Regarding profitability, I would recommend shooting for 20-25% profit with no less than 10% in any year. This ensures that your overall margins aren’t too thin, which gives you the ability to reinvest back into the business, save for a rainy day or even distribute more profit to the owner (you!).

While I value benchmarking against other businesses in the same industry, such as insurance, I think what’s more beneficial here is to compare yourself to yourself.

Think about where you are year-over-year. If your Rule of 40 score is in the 20s right now, don’t worry! Now you know and you can begin to make changes with this in mind.

One of my clients has been running very profitably the last few years, scoring well over 50%. However, his year-over-year growth hasn’t been what he had hoped it would be. So, using the Rule of 40, we have begun to look at reinvesting a percentage of that profit (in his case 10%) into the team and marketing efforts.

If this strategy plays out, a year from now, his business will be growing again at the level he is accustomed to, as well as continuing to be plenty profitable.

The Rule of 40 isn’t just a metric. It’s a tool that helps you balance the drive to grow with the need to stay profitable. It forces you to look at both sides of your business—growth and profit—and make sure they’re working together.

For bootstrapped entrepreneurs, this balance is key. It’s what keeps your business healthy and sets you up for longterm success. So, the next time you’re planning your growth strategy, remember the Rule of 40. It’s your guide to making smart, balanced decisions that will keep your business thriving, not just surviving!

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