Business growth: 10 tips on how to grow sustainably
Sustainable business growth is essential to a company’s financial well-being. The lack of them can seriously damage a company or even bankrupt it. The following tips can be used as a guide to growing a business sustainably:
- Understand the financial health of your business (for example, financial statements, ratios, and sustainable growth rate).
- Build a sustainable business growth model and keep it up to date. A basic formula for calculating the sustainable growth rate (formulated by Hewlett-Packard), which is very useful, is:
- SGR = SWR*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. Stay within this budget.
- Avoid sales just for the sake of the sale. It is critical to keep gross profit margins as close to budgeted figures as possible. Lower profit margins lower the rate of growth achievable.
- Avoid impulsive business decisions and stay focused on the core business. Taking money out of a good deal and investing it in another venture that hasn’t been thought of is often suicide for the core business.
- Improve staff business acumen and improve internal systems to keep up with higher sales.
- Improve sustainable growth rate through higher profitability and better asset utilization.
- Analysis of 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).
- Just borrow more money (above your pre-specified optimal borrowing ratio) or sell stocks as a last resort. The first issue increases a company’s risk of bankruptcy and the second issue dilutes the current shareholders’ equity in the business.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.