Sustainable business growth is essential to the financial well-being of a company. The lack of them can seriously damage a company or even lead to bankruptcy. 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 = 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. Stay within this budget.
- Avoid sales just for the sake of selling. It is critical to keep gross profit margins as close to budgeted figures as possible. Lower profit margins decrease the achievable growth rate.
- Avoid impulsive business decisions and stay focused on the core business. Taking money out of a good business and investing it in another venture that has not 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 the 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 back into the business as possible (in the growth stage).
- Only borrow more money (above your pre-specified optimal debt ratio) or sell stocks as a last resort. The first issuance increases a company’s bankruptcy risk and the second dilutes current shareholder equity in the business.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.