FAQ: What Is a Good Growth Rate for a Company?
As a company develops over time, you can review business data to find the company's growth rate. The growth rate, which is an expression of how much a company's revenue increased over time, can be a helpful metric to use when making business decisions. Anyone involved with a company's growth and expansion should be able to understand how their growth rate compares to other companies.
In this article, we discuss the appropriate growth rate range for a company and how you can use this information.
Why is company growth rate important?
It's important to understand a company's growth rate because it provides valuable information about a company's current success and future potential. Knowing what a good growth rate is and comparing that figure to actual business growth can give business professionals appropriate context for assessing their success, both internally and externally. Some of the primary reasons company growth rate is important are:
Understanding industry standards: Once you know the growth rate for a business, you can compare it to average growth rates for businesses of the same size and in the same industry. This can help you set growth goals, understand how you compare to competitors and determine ways to achieve industry success.
Tracking success over time: Measuring growth rate over different time periods, like weekly, quarterly and yearly can give business professionals insight into how business decisions can impact growth rate at any stage.
Predicting essential resources: As businesses grow, they require more resources like supplies, staff and equipment. Knowing a business's growth rate can help you determine when you need to expand the business infrastructure and plan to get those resources.
Determining business viability: Growth rate is a core metric at any point in a business's life cycle. During a company's startup phase, growth rate is essential for predicting the business's long-term success and sustainability.
Assessing stability: Business leaders at mature companies can use growth rate to determine when they've achieved their maximum potential and ensure a business has stable, sustainable growth levels.
Educating team members: Anyone involved with a business's development, budgeting and operations should know the company growth rate so they can accommodate for that level of expansion in their plans.
Related: What Is Growth Rate?
What is a good growth rate for a company?
Generally, a good growth rate is one that is higher than the overall growth rate of the economy. By reviewing how much the GDP increased in your country over a time frame, you can determine the average economic growth rate and use it to assess whether your company has a healthy growth rate.
Good economic growth can vary, but typically falls within two to four percent. This means that even if a company is only growing five percent a year, it could still have a good growth rate compared to other businesses.
A good growth rate isn't always tied to general economic conditions. Highly competitive startups may need to have an extremely high growth rate to attract investors, with some businesses growing over 100% in revenue during the startup phase.
What factors influence growth rate?
There are many factors that can influence how quickly a business grows. Different types of companies have their own challenges when it comes to finding an audience and attracting customers. A company's growth rate can also change rapidly from one stage of the business to another. Some of the primary elements to consider when assessing your business's growth rate are:
Businesses in some industries have high average growth rates than others. For example, technology businesses tend to have an extremely high growth rate because of rapid technological development, high demand for tech tools and a wide target audience pool. Emerging industries may have growth rates that allow companies to grow exponentially as the industry develops. Some other industries may have lower, more stable growth rates that align more closely with average economic growth.
The state of the economy can have a significant impact on average company growth rates. During times of economic hardship, even successful companies can experience a slower growth rate than usual. Likewise, when the overall economy is thriving, stagnant businesses could suddenly enjoy a high growth rate that helps expand business operations. Economic conditions can also disproportionately impact some businesses while companies that offer essential services thrive.
Companies often have different growth rates throughout each stage of the business cycle. When companies are just starting, they tend to have high growth rates because they are growing from nothing. Businesses can experience explosive growth when they launch because they are reaching an audience for the first time.
As a business matures, its growth rate can decrease to a more sustainable rate, even while the business expands. Some companies experience multiple phases of rapid growth as they launch new products or develop branding initiatives. Finally, a business that is in decline will have a low or even negative growth rate.
Access to capital
A company's access to resources for expansion can also influence its overall growth rate. Some companies would be able to achieve higher growth, but don't have the available cash to purchase the equipment and hire the staff necessary to process more orders or serve more clients. Businesses that have money to spend can generate more growth by financially supporting initiatives to increase revenue and keep up with consumer demand.
How to determine a realistic business growth rate
Actually calculating a company's growth rate is a simple process, but first you have to know what data to collect and what types of financial metrics to measure. If you want to develop projections about the company's future growth rate, it's even more important to consider all of the variables that could impact future success. To determine a realistic growth rate for a business, try following these steps:
1. Work with a financial analyst
Financial analysts are experts in interpreting data related to finances. Working with a financial analyst when developing business growth rate projections can help you develop an accurate understanding of likely growth based on real data. It's important to remember that some financial analysts may have a more optimistic view than others, so their suggested growth rates could either be too generous or too cautious. Gathering multiple opinions from different analysts can help you find a reasonable middle ground to guide business expansion plans.
2. Use multiple growth rate indicators
Instead of just tracking revenue, use multiple types of financial statistics and metrics to determine the growth rate. Some of the indicators you can use to learn about a business's growth are:
Return on equity: The amount that investors earn in proportion to the amount they invested is their return on equity (ROE). Calculating return on equity for shareholders is a great way to consider not only how much a company earned, but how much it was able to pay out to investors. Measuring the growth in ROE over time can help you consider how dividends and reinvested funds impact business expansion.
Earnings per share: For companies that have common stock, earnings per share or EPS can be another good growth metric. You can calculate EPS by dividing the total profit by the number of shares. Tracking the ratio of income to stock shares helps determine how much a company can profit from each share.
Measure the percentage difference for each type of financial metric. If you have a much higher growth rate for some financial metrics than others, you can gain insights into the unique ways your business growth impacts your finances.
3. Factor debt into your calculations
When calculating your growth rate, remember to consider outstanding and future debts. If you have current debt that funded your business or plan to take on more debt to keep up with your projected expansion rates, you should calculate this into your average growth. This can help you be realistic about the amount of your income that you'll eventually need to spend paying back lenders.
4. Be generous with expense estimates
Unexpected costs are a standard part of any business, and it can be hard to plan for expenses when you have to consider unstable outside factors. To ensure that you're considering all possible outcomes in your growth rate calculations, inflate the amounts of your projected expenses.
Many financial analysts and business planners double or even triple cost estimates in categories that have more unknown factors. For example, if you think you're going to spend $10,000 on legal fees each year, you might list $20,000 as the projected legal expense instead to account for any unexpected legal liabilities.
5. Calculate the maximum sustainable growth rate
The sustainable growth rate is the percentage of growth that your business can handle without requiring outside funding or going into debt. Calculating sustainable growth involves determining the ROE and adjusting it for dividend payouts. Knowing the maximum sustainable growth rate can help you set realistic parameters for how much a business could realistically grow using only available resources.
6. Observe trends over time
Part of developing a realistic projection for a company's growth rate is taking multiple measurements. As the growth rate changes over time, look for patterns and trends. If the growth rate three years ago was 20%, last year was 10% and this year was 5% you could predict a 2.5% growth rate for next year instead of assuming that the 5% rate would continue. The more data points you have, the more context you can develop around your future predictions.
Related: How to Calculate Growth Rate
Can a growth rate be too high?
As business growth rises, companies have to adapt to using different growth strategies. Once businesses experience more than 15% growth per year, they're usually considered to be experiencing rapid growth and may need to start investing more money to keep pace with the expansion. It may seem that businesses should try to have the highest growth rate possible, but a high growth rate can actually be harmful in some cases. Once the growth rate exceeds a business's ability to meet demand, it could have a range of impacts on company operations including:
Business leaders and entrepreneurs have to work more and experience burnout
Product or service quality decreases as the company tries to serve more customers
Increased orders clog the supply chain and cause delays
Companies must take on debt to meet operational needs
Supply costs increase as operations scale
When a growth rate becomes overwhelming, you can implement manual business limitations to manage logistics in a measured, controlled environment instead of exclusively responding to outside demand.
What are the uses for the growth rate metric?
Because growth rate is a good predictor of general business health, it has several applications for business strategy. You can use growth rate in many business situations, including:
Hiring new staff: Once you understand how much a business is supposed to grow over a set period of time, you can start planning to recruit and hire new employees to meet the increased need. Aligning hiring plans with the growth rate makes it easier to make small adjustments to internal responsibilities to cover all essential operations.
Pitching to investors: If you're seeking business partnerships or support from investors, you need to be able to discuss future growth potential. Knowing your growth rate can help you educate potential investors using hard data and statistics. You should include historic and projected growth rates when presenting a general overview of your company to investors.
Allocating resources: You can use the growth rate as a guide to ration resources to cover short-term needs and long-term growth. Knowing that you have a high growth rate could help you be more mindful about budgeting in the early stages to accommodate for higher demand on resources later on when the business has expanded.
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