Every business owner wants their company to grow. After all, expansion is fundamental to any company’s long-term success. Yet what a lot of new entrepreneurs might not realize is that there’s such a thing as too much growth.
Over the past decade, the concept of “sustainable growth” has become extremely prevalent within the business community. The business plans of multinational giants and successful franchisees all revolve around this notion of sustainability. But how does it apply to first-time business owners?
Bursting at the Seams
Before attempting to tackle the business implications of sustainable growth, it’s worth setting out a clear definition. In essence, sustainable growth is the maximum rate at which a startup can grow internally without the need for external finance.
In order to find your company’s potential for sustainable growth, subtract its dividend payout ratio from one, and then multiply that figure by your company’s annual return on equity.
Above all else, this figure is one of the best possible signals regarding how your company should approach its long-term financial strategy.
Why is it Important?
If your company is just starting out, it’s pretty crucial for you to know precisely how far you’re able to expand without asking for someone else’s help. By regularly analyzing your company’s potential for sustainable growth, your company will be able to operate naturally within its own means.
If your company has a level of growth that is above your sustainable growth level, that means you’ll have to pursue some form of external funding. There’s nothing wrong with raising funds to promote an aggressive short-term expansion strategy. In fact, this is fairly common amongst startups. There are countless organizations and accelerators willing to help fund a well-plotted growth strategy under reasonable terms.
Yet you should always be wary about taking on external funding. If you’re offered cash from venture capitalists and private investors, they’ll probably ask for some form of equity in your company. If you give away too much equity in your business, other firms or individuals will be able to influence corporate decisions later in your company’s life cycle. You should always be stingy when it comes to giving away equity so that your business decisions stay in your own hands.
Enabling sustainable growth isn’t just about dreaming big – it’s also about correcting costly mistakes. If a startup is expanding at a level far below sustainable growth estimates, that probably means there are inefficiencies that must be dealt with. These inefficiencies could relate to general production, an outdated business model or just wasteful day-to-day operation methods. Either way, if you’re operating below your sustainable growth potential, it’s important that you fully assess your business and get to the bottom of it.
At the end of the day, it falls on you to ensure your business is capitalizing upon any and all chances to improve.
This idea of sustainable growth gets tossed around in business circles fairly casually – but it’s not hard to see why. Sustainable growth is absolutely critical to the success of any company, regardless of its size. In order to ensure your company is moving forward and evolving in line with its own potential, you’ve got to keep tabs on its ability to expand.
About the Author
Rachel Craig is a content writer for Quality Formations.