How to measure business growth
It’s crucial that businesses know how fast they are growing. Having this knowledge will help managers plan for the future as well as show if their growth strategy is working.
If owners know they are likely to have 10 per cent more customers in six months’ time, they can begin to make structural changes to prepare such as hiring new employees or purchasing new equipment.
This article will look at how to measure business growth.
Define your business growth goals
The first step to measuring business growth is to decide on your goals. These will likely be related to the growth stage your company is at.
For start-ups, the goal may simply be to build a customer base and grow sales, even if it means making a short-term loss due to costs associated with the expanding business. However, more established companies may want to improve profit levels while keeping a steady flow of new prospects.
Here are some growth metrics businesses can focus on:
- Revenue – Revenue shows how much money a company is bringing in.
- Higher profits – Higher profits are generally a sign everything is going well. However, businesses will still have to look at factors like the number of customers being onboarded or leads coming in to ensure future success.
- Higher sales – Increases in sales usually suggest a company is growing. Business owners should be wary if a short-term sales increase has been brought about by factors such as heavy discounts or if the increase in sales causes the company to be in danger of overtrading.
- More customers – More customers are a sign of growth. However, it can be an issue if customer acquisition costs are high and customer retention is poor.
Collect data based on these goals
Once a business has defined what it wants to achieve, it will need to collect data based on these goals. The more data companies have, the more accurately they can measure growth.
More data will also enable businesses to spot potential issues. For example, a business may be about to reach its target of 10 per cent annual revenue growth. However, having access to customer acquisition data as well as revenue data could show that the company is failing to keep customers; with the growth instead being facilitated by costly marketing campaigns. This would point to issues in customer retention that, once taken care of, could significantly increase the business’s profitability.
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Don’t forget outside factors
When measuring your company’s growth rate it is important to take outside factors into consideration.
For example, a company may look at a huge increase in monthly sales and put the success down to a recent marketing campaign. However, if the month was December and the company was a toy store, the increase in sales is just as likely to be due to the holiday season. Having long term data can help here as businesses can use this to get a view of wider trends.
How to calculate your company’s growth rate
It’s easy to calculate your company’s growth rate using this business growth rate formula. You simply need to compare the figures that show a growth metric now to a figure that shows a growth metric at a point in the past.
For example, imagine a company that brought in £200,000 of revenue in 2018 and £160,000 in 2017. To find out the annual growth rate, you find the difference between the 2018 and 2017 revenue
(£200,000- £160,000= £40,000).
You then divide this difference by the revenue brought in one year ago and change the figure to a percentage (£40,000/ £160,000=0.25=25%). This puts the company’s annual growth rate at 25 per cent.
Finally, be sure measure growth regularly
Measuring growth should be done on a continuous basis. Keeping monthly or quarterly records will give owners useful insight into how their business is expanding, allowing them to ensure they are growing at a rate that meets targets, without being at risk of overtrading.