The company growth rate, an important measure for businesses, informs investors and lending institutions of the fiscal health of the company. Entrepreneurs and business managers must understand how to compute the company growth rate and analyse what the final figures interpret for their businesses. Likewise, as an investor, you should be aware of a growth rate to make mindful financial commitments.
In this article, we will take a detailed look at the company growth rate, how to calculate it, its types, and more.
Understanding the company growth rate
A company growth rate is articulated in percentage form, measuring specific variables related to growth over a stipulated period. These variables are industry-specific, which means that they vary from company to company. For example, a supermarket might be focused on retail sales, while a cloud-based software business might be more concerned with account growth and annual revenues.
Certain growth rates a business measures include revenue, compound annual growth rates, and user acquisition. This measure helps determine if a business is lucrative and can be used in any growth phase. As an investor, you can use this percentage to gauge whether a company is worthy of funding. Executives, on the other hand, employ these numbers to strategise and distribute resources.
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Formula used for company growth rate
The simple company growth rate formula takes into account the difference between the current period value and the prior period value and divides it by the prior period value. For example, here is the formula to compute the sales revenue growth rate.
Sales revenue growth rate (%) = [Current period sales revenue – Previous period sales revenue / Previous period revenue] x 100
The company growth rate formula can be applied to any metric in question. All you need to have are the current and previous period values. However, ensure that you factor churn rates into the formula to get the accurate percentage. Not factoring in churn rates can give a misleading impression about the company’s growth and might result in stagnation.
Likewise, growth rates in certain seasons and short months may give misleading impressions depending on the nature of the business. Certain months might be shorter because of public holidays. The rate might be greater in longer months as there are additional days to make high revenue. Therefore, it is crucial to comprehend the various aspects influencing business growth so that you can draw company growth rates that are relevant.
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Types of company growth rate metrics
Let us now see the different types of company growth rate metrics, which will help you organise your business’s data more efficiently.
Industry growth rate
Every industry has its own standards and growth rates. Therefore, comparing businesses with other businesses following the same or similar benchmarks makes sense. For instance, the retail sector will have varying standards compared to innovation-oriented organisations. Also, the growth period in some sectors might be intermittent, with growth spurts during intervals of economic development and decreased growth during downturns. However, it is important to note that even though historical data might suggest strong patterns of growth, they may not apply to the company in question due to disparities in the past and present circumstances.
Seasonal growth rate
As the name suggests, companies with seasonal growth rates are likely to witness growth during specific seasons and a slump during the rest of the period. For example, stationery retail chains selling school supplies to students may enjoy a sales spike when the schools open and experience a dive in revenue when schools are closed. These trends are usually outlined by analysing and comparing data over the years.
Compound annual growth rate (CAGR)
CAGR refers to an organisation’s average annual growth rate over a certain period. Here, the assumption is that returns are reinvested on an annual basis, and the growth rate is consistent. The following is the CAGR formula.
CAGR = [{(Ending value)/(Beginning value)}^(1/n)]-1
Where n = the number of years
Producing the same revenue amount as the business expands leads to a decline in growth. This occurs because the sales revenue as a percentage of overall revenue keeps contracting. To grow steadily, businesses must cultivate compound growth or amplify at a quicker pace in each period.
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Leveraging company growth rate
Here is how an organisation can employ its company growth rate to achieve its goals.
- Landing funds becomes easier when a promising growth rate is involved. Investors and creditors use the growth rate to ascertain whether businesses have the potential to expand and whether they will provide a solid ROI.
- Growth rates can be used to design operational and workforce strategies. Assessing such figures gives businesses an idea of how small adjustments in day-to-day functions involving budgets and staffing can influence the company as a whole.
- The company growth rate plays an integral role in the planning and distribution of resources. A business can fail when initial plans are absent and the company undergoes quick growth. It could also occur when a business progresses at a slow rate, leading to wastage. By using this measure cleverly, you can avoid sporadic growth patterns and redundancies.
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Boosting company growth rate
After computing their company growth rate, businesses adopt solutions to improve operations and performance and chart a path to optimised growth. Here are some ways to enhance a company’s growth rate.
- Regular staff training: It is no secret that a capable workforce is the cornerstone of any business. Therefore, by ensuring that the staff is periodically trained and upskilled, an organisation can maintain or revamp its company growth rate.
- Expansion: By expanding the market, companies can improve their growth rate. This can be achieved via product development, where a brand-new product resolves or responds to customer requirements. Another way to spread the base of business operations on an international level is by amplifying presence through digital mediums.
- New channels: One way to reach new customers is to venture into new channels that will help increase the company’s growth rate. This customer base can be expanded with the help of sales, marketing and customer experience solutions. Paid advertising and online content creation are some ways to magnify the efforts to acquire new customers.
- Monitoring results: Something as simple as monitoring business results can help revitalise sales revenue. For example, looking for patterns in customer data to determine the demand level for products can enable entrepreneurs to seize any hidden sales opportunities or gaps. Evaluating the competition is another strategy to understand any potential areas for growth.
Closing thoughts
A company growth rate is a crucial determinant for both business owners and investors. This metric can aid entrepreneurs in optimising their company performance and exploring new market opportunities. Additionally, it helps investors make informed investing decisions so they get their money’s worth in the long run.
