How to Calculate Your Business Growth
If you’ve started a business, your revenue should be growing over time. It’s important to know how fast you’re growing because it will affect your strategic plan. To see your revenue growth rate, you can calculate it here. If you’re just starting out, you should calculate your monthly growth rate, so if you’ve been in business for six months, put in six for the number of periods, and enter your first month’s revenue and your most recent month’s revenue. You’ll get your total growth percentage and your monthly growth rate.
So why do these numbers matter? Here we will discuss some things you need to analyze.
While revenue growth is great, you’ll want to know whether your profit is growing at the same rate or at a higher rate. Over time, your profit should grow at a faster rate because you’ll have fixed costs that will stay the same, no matter how much you sell. You can use the same calculator to measure your profit growth rate – just put in your profit numbers instead of revenue.
If your profit is growing at a lower rate, you’ll need to look at the reasons for that. Analyze your expenses – what expenses are increasing? Some expenses may make sense. For example, you may have had to increase your labor costs.
If other costs are increasing, you’ll need to consider whether those costs were necessary. If those costs are not benefiting your bottom line, you may need to find ways to decrease or eliminate them.
Your marketing costs may be increasing as well, which is why your revenue is growing. However, they should not be increasing at a disproportionate rate to your revenue growth. You need to look at your customer acquisition cost. How much did it cost you in the beginning to acquire one customer? How much does it cost now? That number should NOT be increasing. That’s a number that you need to decrease over time.
To calculate your customer acquisition cost, you need to know the total amount you spent on sales and marketing for any given month and how many customers you acquired during that month. Divide your sales and marketing expenses by the number of customers you acquired. For example, if you spent $500 on sales and marketing and you gained 1000 customers, your customer acquisition cost is $.50. That’s a great rate. If your customer acquisition cost is significantly higher, you’ll need to find ways to reduce that number.
Standard good customer acquisition costs vary by industry. You should be able to do some research and find the average customer acquisition cost for your industry to see how you compare.
You can then also look at your return on your marketing investment. How much did you actually make in revenue from those customers? If your revenue from those 1000 new customers was $5000, you got an investment return of $4,500 divided by $500, which is 900%. Again, that’s a great number. If your number is less than 500%, you may need to look for ways to reduce your customer acquisition costs. If it’s under 200%, you may be in a danger zone.
If your revenue and profit are growing at a fast rate, that’s great! However, it changes the way you should look at your strategic plan. First of all, now that you have historical data, you can project your revenue going forward. If you’ve been growing at a rate of 25% per month and nothing is forecasted to change significantly, you can forecast your revenue for the next six months at that rate.
Now comes the tricky part. With growth may come the need for additional costs. At higher sales levels, you may need more people, or you may need to expand your operational processes and systems. All of those things need to go into your strategic financial plan. You’ll need to project when those additional needs will occur, what they will cost, and how you will allocate your resources to pay for them.
This is part of managing your growth. If you don’t plan for your additional needs, you can easily get into a situation where you have too many sales to handle. That can leave you not being able to fulfill customer orders on time, or it may hinder your day-to-day operations. Many companies have failed for this exact reason. Nothing can kill a company faster than suddenly not being able to satisfy customers or manage operations.
That’s why you need to analyze everything you will need to keep your business going at higher sales levels and plan how you will acquire those things and pay for them.
How’s Your Cash Flow?
Many new business owners focus on revenue and profits while not considering cash flow. Strong cash flow not only means that you can pay your obligations and keep the business flowing, but it also means that you have the capital to invest in the growth of your company and the management of that growth that we just discussed.
You’ll need to have a cash flow forecast within your strategic financial plan so that you know how much cash you’ll have on hand at any given time. If you’re not going to have enough cash to both meet your obligations and add the resources you need to manage your growth, you’ll need to find a way to get it.
You have essentially two options. One, you can better manage your cash flow so that you have more on hand at any given time. For example, if you typically have a lot of accounts receivable, that’s not cash in your hand. You may need to change your accounts receivable collection processes so that your accounts receivable turn into cash faster. The reverse is true of accounts payable. You should be using all the time you can to pay your accounts payable without incurring penalties.
Essentially, you want to make sure cash is coming in faster than it’s going out.
Holding too much inventory also keeps cash out of your pocket. You need to manage your inventory so that you have just enough to fulfill orders, but no excess inventory that ties up your cash.
If your cash flow is being managed well, but you still won’t have enough cash to meet your business needs, your other option is to get a business line of credit. This can be used to meet your short-term cash flow needs, but it should not fund your operations in general. Always look at a line of credit as a short-term loan that you’ll pay back as soon as possible.
Business finances can be very complicated. If your sales are growing, that’s fantastic, but you need to always have a handle on all your numbers. If you are having difficulty doing so, it’s best to seek professional advice as soon as possible before things get out of hand. It’s essential to the future of your business.