Growth rate indicates a company's profitability, sustainability, and growth potential. Read on for a comprehensive understanding of company growth rate, how to calculate it, and how it can help you grow your business.
Company growth rate is a crucial metric for any business. Investors and lenders are very keen on knowing the financial state of the company before they can commit to working with you. As a business owner or manager, you must understand how to calculate your company growth rate and analyze what it means for your business. Here's what you need to know.
What is company growth rate?
A company growth rate measures specific variables associated with growth over a specific period and is expressed as a percentage. The variables are industry-specific, meaning they differ from one company to another. While a department store may be more concerned with retail sales, a SaaS company might emphasize revenue and account growth.
Some of the growth rates that a company may measure include revenue, user acquisition, and compound annual growth rates. This metric is an indicator of whether a business is profitable and can be measured at any growth stage. Investors use the numbers to determine if a business is worth funding, while executives use them to plan and allocate resources.
Company growth rate formula
As an investor, business owner, or manager, it’s crucial you learn how to calculate the growth rate of a company. The basic company growth rate formula is easy to understand and apply. It’s the difference between the current period value and the previous period value divided by the previous period value multiplied by 100%.
For example, to calculate the revenue growth rate:
Revenue growth rate = (Current period revenue - Previous period revenue) / Previous period revenue x 100%
You can apply the company growth rate formula to any metric of your choosing. You need to have the current and previous values for the period in question. Substitute the figures in the formula, calculate, and you have your company growth rate. But the figures need to be carefully evaluated with several things in mind to get the right conclusions out of them.
For instance, if you do not factor churn rate into the formula, the results may be deceiving. Consider the following example. You may see a constant growth rate of 10% over several months, which is good. But where is the growth coming from? Is it from new or old customers? Because if you’re getting new customers every month, shouldn't your business revenue growth rate be increasing instead of remaining constant? You may find you’re actually losing customers while gaining new ones who are responsible for maintaining the growth at 10%. Ultimately, this strong growth rate hides a high churn rate that may lead your business to stagnation if not checked.
Also, growth rate during short months and certain seasons may be deceptive depending on your business. Some months may be shorter due to holidays. The rate may be higher in the long months as there is more time to generate revenue. Hence, it’s essential to understand the factors affecting the growth in your business so you’re in a position to put your company growth rates into perspective.
What are the different types of company growth?
In this section, we look at various types of company growth rate metrics to help you better understand your organization's figures.
Industry growth rate
Different industries have different growth rates and benchmarks. It’s wise to benchmark against those in the same industry when comparing your business. For instance, the retail industry, which has been around for some time, will have a different benchmark compared to companies dealing with cutting-edge technology.
Also, growth in some industries may be cyclic with high growth during periods of economic expansion and low growth during a recession. But even if historical data indicates growth during certain time periods, it doesn’t necessarily mean you’ll experience the same high growth rate if a similar event comes around again. The reason is that economic and industrial conditions may differ from past conditions.
Seasonal businesses tend to enjoy growth during certain seasons and slump during others. For example, if your SaaS company sells services to students, you may experience decreases in sales when schools close and a spike in revenue when they open. Similarly, an ecommerce store may see an increase in sales during the holiday season followed by returns and cancellations soon after the holidays.
Understanding your company's growth rate may be more difficult for you as you can’t compare one month to the other. If you do, the figures won't make sense. But comparing the same month's performance year-over-year helps you gauge trends more accurately.
Compound annual growth rates (CAGR)
Compound annual growth rates refer to a company's average annual growth rate over a specified period. The assumption here is that returns are reinvested every year, and the growth rate ultimately remains steady.
The formula for calculating CAGR:
CAGR=((Ending value)/(Beginning value))^(1/n)-1
Where n is the number of years
Generating the same amount of revenue as a business grows actually results in declining growth. This happens because revenue as a percentage of overall revenue keeps getting smaller. To consistently grow, companies must generate compound growth or grow at a faster rate every period.
How to leverage company growth?
The following are ways a business can use its company growth rate to hit growth goals.
- A positive growth rate makes it easy for you to access funding. Most investors and lenders use growth rate to determine if your business can grow and if it will bring a good return on investment.
- You can use growth rate to make operational and staffing plans. Evaluating the figures shows how small everyday changes such as staffing and pricing affect the organization.
- The company growth rate is critical in the allocation and planning of resources. Poor planning can result in the failure of a business. It can occur if you fail to plan for resources initially and the company experiences fast growth. It can also happen when a company grows too slowly, which results in a lot of waste.
How to improve the company growth rate?
After calculating and understanding your company growth rate, you’re better positioned to make informed decisions regarding which direction to take your business. Even if your growth rate isn’t where you want it to be, the following tips will help you boost your growth in no time.
Provide regular training to staff
Ensuring your staff is properly trained and equipped is a sure way to improve the company growth rate. Thanks to proper training, they’re motivated and know what to do. A solid staff is crucial to the success of your business. Ensure you invest in them, and in return, they will help you achieve company goals.
Try to expand
Expanding your market is another way to boost growth rate. Your business can do this through product development. Responding to customer needs and producing a new product they need will grow your revenue. Also, expanding your base of operations globally through digital platforms is another step in the path to increased growth.
Find new ways to reach potential customers
Adding new customers and retaining your current ones will see your growth rate improve quickly. Diversify your means of reaching potential customers. By having different teams working together, you can better develop a strategy to enlarge your customer base through marketing, sales, or customer experience strategies. You can use content marketing, social media campaigns, or paid advertising as a way to boost your customer acquisition efforts.
Monitor your results
Evaluating your business offering is essential in helping you establish areas of improvement. For instance, if you monitor customers' data, you can track purchase patterns and determine whether there is enough demand for your product. Also, analyzing your competitors is another way to know if they’re trying things your business could also benefit from.
Optimize your company's growth with ProfitWell Metrics
Company growth rate is crucial as it may be the determining factor in getting funding for your business to grow. The rate is also a reflection of whether the management practices at your company are working or need to change.
Although company growth rate is important, it’s only one of many other metrics that need to be measured to ascertain the health of your organization. With ProfitWell Metrics, by Paddle, you can track all the essential metrics for free. Don’t let the success of your business depend on error-prone data. We do the hard work so you can concentrate on other aspects of your business.
Company growth rate FAQs
How do you calculate a company's growth rate?
A company's growth rate is calculated by dividing the difference between the current period value and the previous period value with the previous period value. It’s expressed as a percentage.
What is a good growth rate for a company?
A good growth rate for a company should ideally be higher than the national growth rate. The economic growth rate is usually two to four percent overall. Therefore, a five percent company growth rate is not super impressive, but ok since it’s higher than the national rate.
What is the best indicator of company growth?
The best indicators of company growth are a high gross profit growth rate, sales growth, good cash flow, and improved customer retention rate. These rates are used to assess where your business might be lacking.
What are the benefits of a high growth rate?
The benefits of a high growth rate include increased market influence, more protection in case parts of your business change, minimized risks of doing business, and amortized costs.
What does a company do when it has a negative growth rate?
A negative growth rate refers to declining sales and earnings. This decrease may indicate the beginning of a slump if it happens consecutively for several periods. But often, businesses can bounce back. But company data needs to be evaluated to find out what should be improved upon regardless.