Having a sustainable growth rate for your business is a lot like moving an army wisely. During World War I, the Germans learned that lesson the hard way as they faced an unmovable opponent they hadn’t planned on encountering…railroads.
In the early 1900s, before air travel and decent roads were an option, trains were the best way to move large amounts of troops and supplies over long distances. However, you can’t conquer a nation by hanging around its train stations. At some point, your soldiers have to march and fight. If you go too far too fast, you can quickly outpace your own supplies.
Several times over the 4 years that WWI was being fought, the Germans found themselves advancing so rapidly through France that their supply lines couldn’t keep up. As a result, their soldiers often ran low on food and ammunition…2 things essential for winning any war.
Your business is no different.
Knowing how to grow at a pace that you can sustain is essential to building a company that can stand the test of time. In this post, we’ll show you how your accountant can help make that happen.
Growing Too Fast
Running a growing company is every business owner’s dream. When your business is thriving, profitable, and getting better year after year…life is good.
However, growing too fast can be a problem. When you do, all kinds of unintended consequences begin to show up. In our previous post on “4 Signs a Company Is Growing Too Fast (And How to Fix Them)”, we listed several things that can happen when your business begins to grow too quickly.
Important parts of your company begin to suffer when you grow faster than you can handle:
- Customer Service
- Employee Happiness
- Physical Space
To avoid being a victim of your own success, you need to understand how to scale appropriately without sacrificing those key elements of what makes your company great.
High Growth Companies
It’s probably helpful at this point to clarify what a “high growth company” is. If you look across the Internet, you’re likely to find several definitions and more than a few examples of fast-growing companies.
Most people immediately who think of high growth companies imagine a exciting small start-up (i.e. Silicon Valley tech firm) that has just introduced some innovative technology. Some may not even be companies you’ve even heard of (yet). Take, for instance, some of Fast Company’s “15 Tech Startups to Watch in 2022”:
- Landing AI
- Integrated Roadways
In the past, a list of startups like that included brands that have since become household names:
- Facebook (Meta)
While a majority of “high growth” companies are in IT Services, they are also found in every sector of industry and contribute significantly to our nation’s employment growth. Since the mid-1990s, economists and business analysts have kept track of these fast growing businesses. (originally called “gazelles”). They found that 2.4% of them were responsible for 40% of new jobs from the 1990s into the 2000s.
Each year, Inc. Magazine posts its list of the 5000 fastest growing companies in the U.S. They look at independent, privately-held companies who have been generating a certain amount of revenue since 2018. It’s definitely worth taking a look at. As they say about this year’s results, “a strength runs through America’s small business that defies the forces twisting our economy into such weird knots.”
While there is no set definition for “high growth firms” (HGFs), generally speaking a company is considered high growth if it meets certain criteria developed by the Organisation for Economic Co-operation and Development (OECD):
- Average annualized growth above 20%
- With 10 or more employees
- Over the past 3 consecutive years
That percentage can be measured either by revenue or employee growth, since either category is a result of doing something well in the marketplace.
Internal vs Sustainable Growth Rate
Internal growth rate and sustainable growth rate are often used interchangeably in business finance discussions. However, there are differences that you should be aware of.
Your internal growth rate is the amount of growth your company can handle without having to turn to outside lenders or investors. Growth funding is accomplished by reinvesting part of your profits back into the company.
Sustainable growth includes debt that your company takes on in order to fund growth and expansion. However, in order for this model to be truly “sustainable”, debt is only added such that the business’ debt-to-equity ratio does not change.
You can see two good examples of the internal vs sustainable growth rate on mock balance sheets in a helpful article from GraduateTutor.com titled “What Is the Difference Between Sustainable Growth Rate vs Internal Growth Rate?”
Anytime you can grow your business using internal resources, that’s a good plan. For one thing, it keeps you from owing anyone else any money; you automatically know that you own everything you have in your business. Secondly, it can help keep you from growing too fast and experiencing many of the unintended consequences we mentioned earlier.
Financial guru Dave Ramsey has faithfully delivered a message of “don’t do debt” to his audiences for decades. He also applies that same philosophy to business growth. He has said that businesses should aspire to be featured on the cover of “Slow Company Magazine” since slow and steady always wins the race.
With that in mind, Profitwell.com has several good suggestions for maximizing your internal growth rate:
- Make your current processes more efficient. Examine how your business operates and see if there are better ways to do things, increase staff productivity, and cut down on wasted steps.
- Adjust your products or services. As time goes on, the widget or service you provide may not be as useful as it was in the beginning. By making small tweaks to product design or the way you deliver a particular service, you can continue to keep your business relevant and growing without taking on outside cash.
- Compliment what you’re already doing. No, we’re not saying that a kind word to yourself will help you financially. Consider adding product or service lines that are complimentary to things you already offer. Do you sell home theater equipment? Think about offering to install it for your customers as well. Do you pressure wash homes and offices? Maybe you could detail cars for those same clients since you already have the equipment. The possibilities are endless.
How Your Accountant Is The Key To Managing Growth
Business growth is exciting, but it can also be full of dangerous “landmines” that you need to avoid. Because so much of your growth is tied to your finances, your accountant is in a key position to help you manage things well.
They can easily help you:
- Manage your cash flow
- Stay prepared for taxes
- Find the best ways to raise revenue
- Budget wisely
- Keep an eye on all your important metrics
- Hold you accountable to stay on the best course
Too many small business owners are so close to the day-to-day demands of their business that they aren’t able to maintain a good “30,000-foot view.” Your accountant is in a perfect position (outside the company, but closely connected) to enable you to focus on growing your company in a healthy way.
Don’t Let Fast Growth Lead to Big Problems
Having been in the business of helping small businesses with their finances for over 40 years now, we’ve seen far too many that have grown too fast to be sustainable. Our goal is to partner with you in a way that helps you create a company that can stand the test of time and truly go the distance.
Schedule a call with our team today to find out how you can “expect more from your CPA.”