Maintaining a sustainable growth rate


Growth is the aspiration of the vast majority of business owners, but is it possible to have too much too soon?

Sustainable solutions

‘Sustainable Growth Rate’ (SGR) is an idea put forward by University of Washington professor Robert C. Higgins in 1977. His paper ‘How Much Growth Can a Firm Afford?’ introduces a complex mathematical formula to calculate SGR and assess whether or not a company is growing at a sensible rate. Here it is in full:

SGR = (pm*(1-d)*(1+L)) / (T-(pm*(1-d)*(1+L)))

• pm = existing and target profit margin
• d = target dividend payout ratio
• L = target total debt to equity ratio
• T = ratio of total assets to sales

It might look a bit of a brainteaser but, once worked out, it can give you a strong idea of what annual percentage of growth you should be working towards. Of course, if you need to sit down with an accounting and financial service provider to crunch the numbers, that’s exactly what they’re there for.

How do I know if my business is growing too fast?

Aside from noticing that your actual growth rate is higher than your SGR, there are a number of signs that things may be somewhat out of sync.

One of the biggest, though it might sound contradictory, is cashflow problems. Growth comes at a financial cost, with the expense of hiring new staff, taking on a greater inventory and expanding to larger premises all likely to take a chunk out of your available funds. You may find that these expenses start to dwarf what you are bringing in, and short-term borrowing is needed to make ends meet.

A second signal is that the quality of your work starts to deteriorate. You’ll probably know yourself if this is the case, but signs include gradually losing contracts and customers, or an increased number of complaints. Unmanageable workloads inevitably lead to rushed and unfocused work being carried out.

How can I slow down my growth?

When you first started your business, this would probably have seemed like a real luxury question to ask, but many business owners quickly discover that too much growth in too short a time can cause them real headaches.

Consider scaling back your marketing during periods of rapid growth so that you can gauge whether you’re enjoying a short-term or long-term purple patch. You could also have a think about reshaping your premises to maximise space rather than relocating.

If you need help working out the growth rate best applicable to your business, outsourcing accounts to an expert team like Sollertia can pay dividends.