Sustainable growth is the amount that a business can grow without running into serious issues. Growing too fast can bring your business crashing down on top of you or quickly leave you buried in debt. Growing too slow can be a primer to stagnation and financial issues such as investors backing out. Concentrating on sustainable growth is a critical aspect for any business leader who hopes to achieve steady company growth.
What is Sustainable Growth?
In the world of business, there are no guarantees for success. There are also no sure routes for you to take to ensure the growth of your company. Learning all that you can about sustainable growth methods is the best bet you can make. If you are serious about company growth and want to develop a deeper understanding of sustainable growth, by all means, read on! In this article, I will highlight everything you need to know to grow.
The Importance of Sustainable Growth Rate – SGR
The sustainable growth rate, or SGR, is the highest rate at which growth can occur within a business without having to secure additional finances. In basics, SGR is a common measurement used to predict how fast any given company can grow without needing to borrow money. There is little more important than SGR for an expanding business, regardless of product or industry.
The sustainable growth rate is used by companies to plan for the future. This may include long-term financial plans, borrowing plans, various acquisitions, and more. By closely managing SGR, companies are setting themselves up for optimal profits and company growth.
Without keeping a close eye on the SGR of your company, you are more or less gambling with potential company growth. Unforeseeable setbacks, as well as trends set by consumers, have a significant impact on sustainable growth. Strategy for growth and the capability for growth are also directly reflected upon a company’s sustainable growth. It is in the best interest of the entire company to keep on top of the SGR of your business because of these factors.
Sustainable Growth Rate Formula
Divide your company’s sales by its total assets
This sum will be your company’s asset utilization rate or AUR. In an example, if your company is worth $1 million in assets and did $250,000 in sales for the year, your AUR would be 25 percent.
Divide your company’s net income by its total sales
This sum will be your company’s rate of profit. In other words, the percentage of money from sales that your company keeps each year. If it costs you $200,000 to pay your bills and your net income is $250,000, you would be left with $50,000: A profit rate of 20 percent.
Divide your company’s total debt by its total equity
This sum will be your company’s financial utilization rate or FUR. In an example, if your company’s equity is $500,000 and its total debt is also $500,000, your FUR is 100 percent.
Multiply AUR, profit rate, and FUR
This sum will be your company’s return on equity or ROE. The amount of profit that your company keeps and uses for future profit growth. Based on the above examples the following, 25 x 20 x 100 = 5 percent ROE.
Divide the net income of your company by total dividends
This sum will be the dividend rate — the percentage of income given to shareholders. In an example, if your net income is $50,000 and your dividends are $5,000, your dividend rate would be 10 percent.
Subtract your dividend rate
This sum will be your company’s retention ratio — the amount of money that your company keeps after paying dividends to shareholders. Based on the above examples, 100 – 10 = 90 percent retention rate.
Multiply your company’s retention rate and ROE
This sum will be the magical SGR, which is the return on investments you can expect without additional financing. Based on the above examples, 5 x 90 = SGR of 4.5 percent.
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Tips for Sustainable Growth Mastery
In order to ensure the healthy and sustainable expansion of your business, keep the following tips in mind:
Focus on the future
In order to master SGR and achieve optimal company growth, you have to keep your eyes on the prize. Strictly thinking about profits is not enough; you have to put some serious efforts into analyzing company performance and plan for the future.
Related: 7 Exit Interview Tips to Drive Growth
Remember why you’re in business
Never forget what got you started on your path to success. A strong sense of purpose makes a world of difference when it comes to successful company growth.
Create and follow a growth plan
Not having a growth plan is a major mistake that nearly nine out of 10 business owners make. While a plan will not assure you of company growth, it will surely help you stay the course.
Dedicate a certain amount of time and energy to creating new forms of revenue. Specifically, focus on developing forms of revenue that are recurring long-term. In doing so, you will be increasing the SGR of your company.
Uniqueness in business
There are millions of businesses around the world, many of which are obviously sharing the same industries. Find what makes your company unique and run with it. Businesses with something extra for its customers have better rates of success.
In business, satisfaction is one of the most important aspects of company growth — the satisfaction of customers as well as the satisfaction of employees. Take measures to ensure that everyone stays satisfied. The result will be steady company growth.
In order to stay on top of SGR and company growth, a company’s leaders must evolve with the needs of the business. At every turn, companies require flexibility. Company management systems must be as adaptive as the market requires them to be for maximum growth.
Succeeding in Company Growth
Sustainable growth is one of the most significant challenges for any business owner, regardless of industry. There is no sure way to success, nor is there any fool-proof means to company growth. Simply understanding your business and all there is to know about it go further than almost anything. Basically, you need to be fully aware of all the factors that affect your business. Otherwise, you’re taking shots in the dark with your attempts to grow.
Aim for your targets. Know what you do and why you do it. Choose your market and stick with what you do best. Understanding the purpose of your company and how it relates to your given industry is more than crucial. As far as sustainable growth, having your purpose pegged is a must. Knowing your business like the back of your hand, so to speak, should be the goal of every business owner concerned with SGR.
Once you find your groove, stick with it and build on it. Every other business in the United States loses half of its customers over the course of five years. Take action so that your company doesn’t eventually fit into that category. Pleasing customers should be one of your main priorities. It’s three times easier to sell to an already existing customer than it is to find a new one.
When it comes to sustainable growth, stay completely informed about your business and be proactive. Put proven SGR tactics to work and focus on investing only what you can afford. Be wary of accumulating too much debt too fast. Pay attention. Be humble. Take chances, but make sure they are always calculated on accurate information in order to ensure sustainable growth.
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