If you asked many business owners whether they wanted their company to grow, they would likely say yes, of course. Growing too little or too slowly leads to stagnation. What is more, a business that doesn’t grow is in danger of becoming irrelevant. And after all, what do you want for your business if not to grow and flourish?
However, growing too fast can come with a new set of problems. For one thing, how will you fund that growth? That is why the simple goal of growth is not enough to make your small business successful. Instead, what you need to aim for is sustainable growth. In this article, you will find out what sustainable growth is, how to calculate it, and what it means for your business. Then, with the help of your small business accounting team, you can reach for a new level of growth.
Would you like to find out how to grow your company sustainably? Contact Financial Optics to get started today.
Understanding Sustainable Growth
Although you may have heard of sustainable growth, this concept is often new to small business owners who are just starting out. Either way, the idea is an important one. After all, knowing your sustainable growth rate and using it while making informed decisions about your company can prevent mistakes and bring many rewards.
Sustainable Growth Defined
So, what is sustainable growth? Sustainable growth is a rate of growth at which you can make the maximum number of sales without supporting that growth by borrowing money. Some companies fund their growth by taking on new debts. Others do so by engaging in equity financing, which is basically selling off a part of your company to an investor.
Yet, ideally, you would grow your business without incurring either type of debt. Instead, you would stay below this ceiling of sustainable growth so that your business activities rather than debts support the growth. By contrast, non-sustainable growth typically amounts to short-term success that fails in the long term.
How to Calculate the Sustainable Growth Rate
Calculating your sustainable growth rate gives you valuable information about where you stand right now and what you can expect in the future. Essentially, it tells you if you are on the right track for long-term success. However, before you make this calculation, you must determine two other figures. The first is your Return on Equity. The second is your dividend-payout ratio.
You can get the numbers you need from your small business accounting team based on the transactions recorded in your small business bookkeeping software or by your small business bookkeeping staff. Then, a virtual CFO can help you calculate and interpret your sustainable growth rate.
There are two different formulas for ROE, depending on the structure of the business. For sole proprietors, the formula for ROE is simply the net profit divided by the closing capital, then multiply by 100 to convert the decimal to a percentage.
The other formula is for companies, such as LLCs or corporations. To figure ROE in this case, you divide the profit after tax and dividends by the equity, which includes equity capital, reserves, and retained profits. Then, again, multiply by 100 to get the percentage.
Next, you need to find your dividend payout ratio. This is the percentage of your company’s earnings that you pay out in dividends.
Now, to figure your SGR, you can use the formula “ROE x (1-dividend payout ratio.” The resulting number represents an estimate of your maximum sustainable growth rate.
Remember that small business accounting is about more than keeping track of your day-to-day finances. You can use the insight you gain from these numbers to improve your business’s success.
Factors That Influence Sustainable Growth
Many factors can have an effect on what level of sustainable growth is possible. Some of these issues are things you can control within your business. On the other hand, there are other factors that you can’t control.
For example, the state of the economy may affect it. In times of high inflation, it is usually more challenging to maintain a high level of growth. Also, when people have less disposable income due to high housing costs, they will tend to spend less on other things. This could also affect your sustainable growth. Other factors include customer expectations, competition within your industry, and indeed, the type of industry in which you operate.
Sustainable Growth and Your Business
At this point, you may be wondering how you can understand and apply the concept of sustainable growth in your specific business. Before you can do anything else, you need to have an excellent small business accounting and small business bookkeeping team working to get you the information you need to assess your growth.
Next, you need to determine what the best growth rate for your business is. Then, you should consider ways to sustainably increase your company’s growth.
What Is the Optimal Growth Rate for Your Business?
Every industry is different. While a company in one industry can grow at one rate, a company in another industry might be able to grow much faster in the long term.
Here’s an example. According to Investopedia, Walmart’s growth rate as of August 19, 2020, was 12.7%. That is, the company could grow at this sustainable rate without selling equity or adding debts. However, other sources have suggested that the maximum sustainable growth rate for a technology company or other service business would likely be much higher.
Finding your SGR may be challenging, and you may need help interpreting and knowing how to act on it. Even if you have no trouble doing the calculations to figure your SGR, you may need help to determine if this is only your current SGR or if it is your ideal long-term growth rate. Then, you may want advice on ways to improve it if needed.
The best way to find out your SGR and address sustainable growth in your business is to get advice from an expert in accounting and finance, such as a virtual CFO. A small business accounting firm that provides outsourced bookkeepers, accountants, and virtual CFOs can help you with this.
What Can You Do to Increase Sustainable Growth?
A financial advisor can certainly calculate and explain what you need to know about your sustainable growth. They can also analyze your current business operations and help you find ways to increase sustainable growth. Depending on your unique business, they might suggest things like the following.
- Managing accounts payable more efficiently so that you are paying bills and meeting obligations on time and without late fees.
- Managing accounts receivable so that the money you and your team earned is coming in to be used for expenses and growth.
- Refining your unique value proposition statement and use it in your marketing to overcome excessive competition in your industry.
- Taking initiatives to retain more of your current customers.
- Adding a new service or product in a way that doesn’t increase your debts.
- Continuing to measure your growth to gain clarity so you can stay on course.
All these ways to increase your maximum sustainable growth rely on excellent bookkeepers, accountants, and financial advisors. Unfortunately, for many small businesses, hiring a full-time, in-house accounting team is too much of a financial burden. The good news is that you can choose outsourced accounting services, outsourced bookkeepers, and a virtual CFO to give you the financial services you need, when you need them, at the lowest cost possible.
Getting Help with Sustainable Growth
As you might have guessed, sustainable growth is a complex issue. What’s more, if you aren’t a financial services company, this subject is outside your specialty. Beyond that, as a business owner or manager, you probably don’t have a lot of spare time to spend learning everything there is to know about sustainable growth. For all these reasons, you may benefit from having help from an accounting firm like Financial Optics.
Outsourced bookkeepers ensure that your financial transactions are properly recorded and tabulated. When they take care of your small business bookkeeping, you can keep an eye on your accounts payable and accounts receivable. That, in turn, ensures that the money is always going where it needs to go to keep your company growing surely and sustainably.
Outsourced Accounting Services
With outsourced accounting services, you go beyond mere bookkeeping to gain insights into your numbers. Our small business accounting team can help you understand where you are now and what your company stats indicate.
A virtual CFO can weigh in on decisions you need to make to increase your SGR. They offer financial advice for small businesses based on years of experience in helping companies like yours thrive and grow in nearly every market condition.
Together, your accounting team at Financial Optics can help you maximize your sustainable growth and reach for your highest success.
Are you ready to take your company to the next level of growth? Reach out to Financial Optics for help in achieving increased sustainable growth.