What’s a healthy growth rate for a company? It’s one of the most common questions were asked? Our answer depends on a number of factors including specifics about the business and the industry they work in.
In the broader sense of the business universe and for the sake of this article, the following principles are widely accepted.
- Growth companies are growing faster than the overall economy.
- Mature companies are growing at or near the rate of the economy.
- Declining companies are growing slower than the overall economy.
For a developed economy, an annual GDP growth rate of 2%-3% is considered normal. Therefore, any GDP growth above the said rate is a strong sign that an economy is expanding and prospering. A prospering economy creates more wealth, which leads to increased spending.
Some industries, like the tech industry, operate in their own special universe. When analyzing the growth rate of any business, it’s important to understand the industry first. Most business owners are hyper-focused on growth with little thought systems management, regulatory, administration, accounting, service, etc. If you’re a retailer that has to carry inventory, financing that inventory is a big consideration. If the business doesn’t have lined up long before they need it, a 50% growth rate could wipe them out overnight.
The growth bottlenecks in every business are different.
In 2007, Eric Flamholtz and Yvonne Randle wrote a book on the Growing Pains identified five annual growth rate levels for small businesses:
- Less than 15 percent: Growing
- 15 percent to 25 percent: Rapid growth.
- 25 percent to 50 percent annually: Very rapid growth.
- 50 percent to 100 percent annually: Hypergrowth.
- Greater than 100 percent annually: Light-speed growth.
We see these growth rates from the smallest mom-and-pop companies to global leaders. This enormous growth rate spread across businesses in all industries brings up several very good questions:
- What is the ideal growth rate between growing too fast and not being able to keep up with demand, or growing too slowly and not having the resources to create demand?
- What’s the elusive growth rate sweet spot for a business?
- Where should business owners focus their efforts?
Know Your Numbers
316 Strategy Group has consulted with hundreds of businesses. One thing we’ve learned is that business owners can rarely answer the following questions about their growth rate:
- What is the break-even point as the floor for your sales growth?
- This is the absolute minimum in sales you need to make in order to stay in business?
- What is the optimum level your sales can grow without new financing, exhausting your cash flow, and risking your business?
- This is referred to as the sustainable growth rate. It is the ceiling for your sales growth.
It’s been our experience that businesses often tout robust growth rates. It is also experience that many of those businesses are not growing profitably. They’re probably borrowing from past success with accumulated cash, or they’re borrowing from the future. Every day we’re approached by a business sourcing funds from angel investors or financial institutions. From our vantage point, neither scenario is good. Utilizing the cash to fund future projects robs the business of operating capital. And borrowing money from creditors to fuel these future projects only adds to the pressure.
Business Growth Strategy
316 Strategy Group advises and encourages companies to seek a sustainable growth rate that is responsible and sustainable. We get uneasy when owners discuss hyper-growth models that exceed 100% growth rates.
As business growth strategists, we recommend you cautiously consider your growth strategy. Our team of strategists is taking appointments now to discuss your next growth move.
Be careful what you wish for.