When we are engaging in a business, the business’s success depends on the growth rate of the business. Initially, we all start with a small business. If we can have a better business growth rate, we can develop our small business into a huge one. Many business owners think, what is the acceptable rate of growth rate for a small business? Therefore in every business, there are ups and downs. Sometimes, a business will fail due to various reasons. But we have to identify the problems and set precautions to get our business into a better growth rate.
Let’s see more about the business growth rate.
What is the Acceptable rate of growth for a small business? The answer!
A sustainable growth rate is the acceptable rate of growth for a business. Between 15% and 45% of the year over year growth rate is a considerable amount for a business. But this also depends on the business type, business life cycle, and many more factors.
What is the growth rate and why it is important
The growth rate is the rate of percentage change of a specific variable within a specific period.
If we consider a business, we usually measure the success of the business by the revenue. So business growth rate is the rate of the revenue percentage change in a specific period like monthly or annually.
Apart from the revenue, we can measure this with the customers, sales, or cash flow.
If the revenue or sales has increased within a certain period, we consider that our business has a positive growth rate.
But, if the cash flow has decreased within a certain period, it has a negative growth rate.
You can have a successful business with a positive growth rate. The growth rate is the most important factor for any business, especially for a small business.
The growth rate is the ultimate indicator of the performance of a business. It measures how fast business is growing, not growing, or achieving its goals.
The growth rate helps us to get an idea about our business and make plans for our business.
Think, if your business has a negative growth rate, it means your business is facing a problem of earning money. Then you can find the issue for that and solve the problem that leads to less growth rate.
You can change your business plans in a better way. If you didn’t calculate the growth rate, you would never know that your business is going down.
Since we are talking about small businesses, sometimes we may have to search for investors to expand and grow our business. So, in those situations, if we can show others that we have a better business growth rate, more people like to invest in our business.
Further, it helps to increase your customer base. When your customers indicate that the business is growing day by day, they also like to deal with you.
The growth of the business can increase the credibility of your business. It allows you to broaden your supply base and improve stability while making higher profits.
Why should you know your business growth rate?
As a business owner, you should know about your business growth rate. It helps in many ways. It leads to taking advantage of new opportunities. You can plan the future of your business with a better image of the growth rate.
Think that you will hire new employees, and you have a plan to expand your business by establishing new branches.
If you know about the growth rate of your business you can successfully implement those plans.
So if you have a positive and high growth rate, you can take the challenge of expanding business because you know you can manage it.
But if you have less growth rate, you have to work to increase it by using various strategies.
Hiring new employees and expansion of business is risky. It also helps you to respond to the market demand and increase the market share of your business.
If you know about the growth rate, you can diversify your business. You can make partnerships with others to expand the business.
When you enter into a partnership, you can confidently indicate the success of your business since you know about your growth rate.
How to calculate the growth rate
You can analyze the revenue monthly to judge and plan your company’s future and get an idea about the current situation. Apart from that, many businesses calculate the growth rate to analyze their business.
Calculating and monitoring growth in various aspects will provide more specificity and lead you to better decision making.
Growth rate measures how fast your company is growing. Usually, growth rates of a business look at things like revenue, customers, and accounts.
There are different ways to measure the growth rate. People measure it based on various variables in their businesses.
You can also decide a variable as per your business to measure the growth rate.
Some of the major variables are revenue, market share, and user growth rate. For small businesses, revenue and user growth rate are the most suitable variable to measure the growth rate. And with the development, it can measure by market share.
This is the most common metric to measure the growth rate.
You can get a better idea about the increase or the decrease in the revenue in business with the number of sales between two periods. It shows as a percentage and indicates how your company revenue has grown or shrunk over time.
You can calculate monthly, quarterly, or annually as your preference. So both positive and negative changes in revenue growth provide you with more realistic information on your company’s financial health.
Recommended Read: 12 Things a bookkeeper can do for a small business: You can’t ignore
There is an important thing that every business owner should know. That is the difference between revenue and net income.
If further clarified, Revenue is the total income generated by the sales related to the company’s primary operation. This considers as “the top line.”
The net income is the total earnings that the company receives, which also call as profit. This refers to “the bottom line.” When examining the financial sustainability of the company, both revenue and net income are important.
- Market Share
Market Share growth is another way to determine or calculate the growth rate of the business.
And the Market share is the portion of a market controlled by a certain company. If you measure the market growth rate, initially, you must have a better idea of total market size as per the revenue.
It includes total sales of the entire market with your business and all other competitors that combined. When you determine the starting value, you can calculate the market growth rate.
Market Share Formula
Market Share = (Your Firm’s sales / Total Industry sales) x 100
The market growth rate is an indication of your business’s long term sustainability.
If your business has low sales than other competitors in the market, it indicates that you have to investigate the reason for low sales.
- User Growth Rate
The user growth rate is the calculation of your new customers and It is the percentage of new customers you gain every month.
Customers are the most important part of a business.
If the customer growth rate is in a positive trend, it means more people like your business or product.
If you get a downward trend on the customer growth rate, you have to use new strategies or change your plans to get more customers.
Calculating Growth Rate
- Choose a variable
You can select any of the variables that we mentioned earlier, revenue, market share, and customer growth rate.
If you have a small business, choose the most reliable variable that can make the easy calculation.
- Find the starting value for a given period
You need to find out the starting value according to your chosen variable.
If you select revenue, then find the initial revenue at the beginning of the month. If you choose customer growth, find the initial number of customers you had in a certain period.
This value indicates the performance of your business for that period.
- Find the end value for a certain period
After finding the initial value, you have to find the final value for a certain period.
For example, if you get the initial revenue as a starting value, you have to find the end revenue of a particular month.
This final value will indicate the performance of your business.
- Apply the starting value and the end value to the growth rate formula
There are simple two equations to measure the growth rate. You can choose one of them and apply their values.
Growth Rate = (End Value/Start Value) -1 x 100%
Growth Rate = (End value – Starting Value) / Starting Value x 100
You can calculate the growth rate of your business by these formulas.
If we consider below example,
Company A is a startup company that delivers fruits to supermarkets. The sales department of the company wants to calculate the sales growth rate from the fiscal year that ended on 30th March 2019 to the fiscal year ended on 30th March 2020 (The year 2019-2020). In the first fiscal year, there were sales of $100,000, and the final year, they had $180,000 of sales. So, the growth rate of sales may be,
According to 1st formula,
(180,000/100,000)-1 x 100% = 80%
According to 2nd formula,
(180,000-100,000)/100,000 x 100 = 80%
This period can change according to the business. Some businesses calculate their growth rate monthly, while some calculate yearly.
If it calculates monthly, values should take the first month and the last month of the calculating period.
What is a good growth rate for a small business?
Most people are searching for the best growth rate for their business. But this may depend on the business type and growth rates vary from industry to industry.
But there is a general benchmark for the average growth rate of a business.
Usually, a business should have an average growth rate between 15% and 45% over year growth.
This also depends on the stage of your business.
There are various stages in a business-like startup, growth stage, mature stage, decline, or renewal stage. Therefore the resources of the business and the tolerance rate for the risks depend on the stage of your business.
As an example, if your business is in a startup stage, then you have to use the business’s profits for its financial growth. Then the profits may increase very slowly. You may have a slower growth rate at that stage.
Both the rapid growth rate and a slower growth rate are not suitable for business every time. Sustainable growth is the most suitable for a business. It indicates somewhere between rapid and slow growth rate.
How to generate a sustainable growth rate?
- Have a strategic plan
If you have a better strategic plan for your business, it will lead to a better growth rate. Don’t think about the fast-growing always.
If the industry or market that relates your business has good demand among customers, you can take advantage of it.
Always try to achieve the goal. So if you have a small business, you must have long term and short term goals. If you try to accomplish those, your business will make a better growth rate.
- Consider the financial status of your business in every decision
Always consider Return on Investment (ROI) when you make decisions.
Even though you have better sales growth, always think about the future. Wisely invest in keeping your business current and to grow.
Most businesses with slow growth neglect to invest in new employees, new marketing campaigns. But this will lead your business to be less competitive.
The growth rate is the measurement of revenue, whether it increases or decreases in relevant periods.
And also, it gives an idea about the potential to expand the revenue in the future. So, the growth rate should be the key focus of a business.
For small businesses, it is more important since they are growing further. A better business plan may help to manage the business growth rate at an acceptable rate.