Most companies want to grow. But what is a good growth rate for a business, and how does that affect cash flow? And how can you tell if your business is growing too fast or too slow?
The answers to these questions depend on several factors, including how long your company has been in business, your resources and your tolerance for risk. First and foremost, you need to consider which phase of growth your company is in. Is it a new startup experiencing a growth spurt, or is it a mature business undergoing a decline or a renewal?
Every stage of the business life cycle has its own nuances. For example, a startup that needs to finance growth from its own profits may choose a slower approach — or lower rate — for growth. A business in a rapid-growth industry, on the other hand, may need to expand quickly to capitalize on a hot market.
As your business progresses, you can evaluate business data and metrics like free cash flow to determine your growth rate. Because the growth rate can indicate your company’s profitability, sustainability and growth potential, it can be a helpful metric to use when making strategic decisions. Hiring new employees, forecasting cash flow, upgrading equipment, applying for credit or planning further expansion are a few examples of business activities that can be informed by your growth rate.
How to calculate growth rate
Growth rate can be measured by an increase of a metric over a selected time frame. You can apply the company growth rate formula to any metric of your choosing. Metrics include:
Revenue
Employees
Sales
Customer base
Cash flow
Market share
For example, to calculate the revenue growth rate:
Revenue growth rate = (Current period revenue – Previous period revenue) / Previous period revenue x 100
(Current period revenue – Previous period revenue) / Previous period revenue x 100
= Revenue growth rate
What is a good growth rate for a business?
You may think that faster growth is always going to be better than slow growth. However, it’s not that simple. For a business to grow without financial and operational challenges, it must scale at a rate that takes into account higher demand. For example, if your business is growing faster than you can manage, you might find your resources stretched too thin to meet the increased demand. If it grows too slowly, your company might not be able to survive.
Key factors to consider when evaluating your growth rate
There is no uniform method for evaluating “good” business growth. Your growth rate is unique to your business and can be impacted by many things. How you interpret growth will influence how you calculate your growth rate and how you use that metric.
However, generally speaking, a healthy growth rate should exceed the overall growth rate of the economy or gross domestic product (GDP). Further to that, Harvard Business Review suggests that most companies should grow at a rate of between 10% and 25% per year.
Ultimately, what is considered to be a good growth rate can depend on many different elements, including:
Company size
Company age
Industry
Economic or market conditions
Financial position
Signs your business is growing too fast
Rapid growth can be damaging to a company if it isn’t sustainable. Fortunately, there are usually some early indicators that can signal the potential for trouble ahead. Here are some telltale signs:
Cash flow challenges
Cash flow issues are one of the biggest warning signs that your business is growing too fast. As demand grows, you’ll have to purchase materials, inventory and equipment, and hire more employees to keep up. Cash flow management can quickly become a problem when your expenses are growing faster than your income. Depending on your customers, terms of net 30 can end up being net 45, net 60 or longer. In fact, most of the cash flow problems associated with rapid growth are a result of money being tied up in accounts receivable.
To prevent cash flow issues, it’s good to build up a cash reserve and accurately forecast cash flow so you can make the call to slow purchases if necessary. You could also implement an early payment solution like C2FO’s to help accelerate payment on your invoices.
Operational issues
Fast growth can put a lot of pressure on your internal processes and infrastructure. Projections and operational plans are hard to sustain when you’re taking on more work than you can handle. For instance, you could incorrectly calculate your margins or the added cost to meet increased demand and end up with profitless growth.
Furthermore, in the rush to keep up with demand, growing businesses sometimes neglect to create and document systems and processes for their operations. As a result, efficiency, productivity and quality may suffer. If shipments are late or products need reworking, you’ll have unhappy customers.
It’s important to remember that as your business grows so does the need for organization. Taking time to develop and document systems and processes will save you effort and money in the long run.
Ineffective hiring and talent management
With business growth, you’ll need to expand your team. However, if your business is growing too quickly, it can be hard to keep up with hiring and maintaining resources. When you need help and you need it now, you are more likely to rush through the hiring process rather than waiting to find the ideal candidates. This can lead to hiring mistakes, poor performance and additional recruiting costs.
In addition, not taking the time to train new hires thoroughly may amplify the problem. Training costs time, money and materials, but overlooking the training process can cause your company more damage in the long run.
Employees are the foundation of every business, so it is important to make time to hire carefully, offer competitive pay and benefits, provide adequate training, and build enough time into your schedule for it.
Declining customer satisfaction
Your customers are the lifeblood of your business. A fast-growing company might have many new customers or clients, but are they satisfied and returning for repeat business? No matter how fast you’re growing, you can’t afford to lose sight of the customers that are buying your product or service. Failing to take customer service seriously and providing unsatisfactory experiences can come at a very high cost to your business. In a recent customer experience report, 61% of customers said they would switch to a new brand after just one bad experience.
Things can start to fall through the cracks and errors can be made more easily when you don’t have the resources to handle the workload. If you’re starting to receive more customer complaints or negative reviews, it’s likely that you’ve overextended your resources. The result could be that your business reputation takes a hit that’s hard to recover from.
Signs your business isn’t growing fast enough
Very slow or lagging business growth can be equally damaging to a business. Here are some red flags that might indicate your business’s growth is too slow:
Complacency has set in
Is your business growing too slow? Complacency, penny-pinching and overworked staff are just a few key signs.
The business is hanging on to cash or penny-pinching
Businesses that become stagnant sometimes hold their cash idle for fear of overspending or affecting the bottom line. However, a company can create more risk for itself by neglecting to invest in employees, new infrastructure, equipment upgrades, marketing, or research and development.
In a world where industries and business conditions are constantly transforming, you always have to be prepared for the unexpected. You risk becoming obsolete and losing both share of minds and share of the market to your competition. Furthermore, if you’re trying to cut corners or save money by penny-pinching on an expense that significantly impacts the customer experience or that compromises the business’s ability to run efficiently, your efforts will probably backfire.
Putting money back into your business is a critical factor in any strategy to accelerate growth. Even if you’re focused on short-term profit, it’s crucial that you reinvest in the business when you have adequate cash flow. This will strengthen the foundations of the business and enable it to grow over the long term.
Your employees report being understaffed or overworked
Slow-growth businesses are often understaffed, whether that’s because they have chosen to operate with a lean team for financial reasons or because the business has been unable to attract employees. As a result, employees and managers tend to take on multiple roles and work long hours, making them less effective. When staff are overworked there is also a risk of lower morale and losing quality employees as they become exhausted, unmotivated and more prone to burnout.
If you are unable to hire more permanent employees, consider outsourcing to freelancers or independent contractors as a lower-cost way to get the talent you need.
Managing cash flow and obtaining financing is a struggle
Businesses that grow too slowly may find it hard to get financing from sources that expect high rates of return, such as equity investors or venture capitalists. They may even find it difficult to get approved loans from traditional lenders if the business is perceived as stagnant rather than stable.
If you don’t have sufficient capital to invest in growth, you need to improve cash flow and, therefore, your working capital. One debt-free way to do this is to leverage an innovative solution to free up cash flow. For example, using C2FO’s Early Payment program can help you increase working capital and establish a more stable revenue stream, therefore improving financing eligibility. Early payment programs also offer the benefit of being more convenient and cost-effective than other lending options, like bank loans.
How to ensure a sustainable growth rate for your business
Somewhere between rapid growth and slow growth is sustainable growth: the pace of growth that’s realistic for your business to attain without falling victim to the challenges above. Sustainable growth looks different for every business, but the following tips will help you ensure your business is on the right path:
Create a growth strategy
Prepare a growth strategy that lets you understand the risks and opportunities for your company. Developing a thorough growth strategy will enable you to set effective goals, think about tactics, and set KPIs to measure your progress and keep you accountable. For example, if you keep missing your revenue targets or your tactics are not working, you can reassess your growth strategy and adjust as needed.
Understand your finances
Ensure you have a healthy balance sheet and are making smart cash flow decisions. Developing a solid understanding of financial terminology, your financial statements and key financial metrics is a crucial aspect of being a savvy business leader. If you don’t understand how your business is performing, you can’t make informed decisions. When you have a better understanding of accounts receivable and accounts payable, cash flow, budgets and revenue, you can compare your company’s current assets with previous ones to measure growth.
You can also plan ahead for potential high-growth periods by developing a strong cash flow forecast. Or you might decide to invest in innovative financial technology such as an early payment program to increase your liquidity as you grow. After all, when customers owe you money for long periods of time, your business is missing opportunities that cash could provide.
Keep your employees happy
One of a business’s strongest and most important assets is its people. With a happy, engaged and motivated labor force, your company will be in a solid position to achieve maximum productivity, efficiency and sustainable long-term success. If you treat employees well and give them the proper guidance and tools, they can help reduce operating costs while boosting sales and revenue.
Be customer-centric
Customer-centricity is a business approach that prioritizes positive customer experiences. It is shaped around building qualitative and sustainable growth for your business while putting customers at the forefront of your strategy. Customer-centric companies are focused on seeing the world from their customers’ point of view, identifying needs and delivering complete, long-term solutions. In fact, research shows customer-centric companies are 60% more profitable than companies with alternative business practices.
The bottom line
High or low, fast or slow? Whichever approach to growth you choose, each has its own challenges and rewards. Thoughtful planning, careful management and financial savvy can help you negotiate the ups and downs.
This article originally published October 2017, and was updated October 2022.
