Sustainable business growth is essential for the financial well-being of a business. Lack thereof can seriously harm a business or even leads to bankruptcy. The following tips can be used as a guideline to grow a business sustainably:
- Understand the financial health of your business (e.g. financial statements, ratios and sustainable growth rate).
- Build a model of sustainable business growth and keep it up to date. A basic formula for calculating the sustainable growth rate (formulated by Hewlett-Packard), that is very helpful, is:
- SGR = ROE*r
- where:
- SGR = sustainable growth rate
- r = retention ratio (1 – dividend payout ratio)
- ROE = net profit margin * asset turnover * equity multiplier
- Budget according to achievable growth based on the sustainable growth formula. Keep within this budget.
- Avoid sales just for the matter of the sale. It is essential to keep gross profit margins as close as possible to budgeted figures. Lower profit margins decrease the achievable growth rate.
- Avoid impulse business decisions and keep focused on the core business. To take money out of a good business and invest it into another venture that has not been thought through is often suicidal to the main business.
- Improve the business acumen of personnel and improve internal systems to keep up-to-date with the higher sales.
- Improve the sustainable growth rate through higher profitability and better asset utilization.
- Analyse products, suppliers, customers, regions, etc. more or less according to the Pareto principle (80-20 rule). Get rid of those that are not really profitable or waste too much time and energy.
- Put as much money as possible back into the business (in the growth stage).
- Only borrow more money (above your pre-specified optimum debt-ratio) or sell equity as a last resort. The first issue increase the bankruptcy risk of a company and the second dilute the current shareholders’ equity in the business.
Copyright© 2008 by Wim Venter. ALL RIGHTS RESERVED.
