Sustainable sales growth rate

The sustainable growth rate SGR is the maximum rate of growth that a company or social enterprise can sustain without having to finance growth with additional equity or debt. The SGR involves maximizing sales and revenue growth without increasing financial leverage. Achieving the SGR can help a company prevent being over-leveraged and avoid financial distress. First, obtain or calculate the ROE or return on equity of the company.

Sustainable Growth Rate

A sustainable growth rate is the rate a business can increase it's income without having to borrow more money from lenders or investors. As a small business owner, the rate represents how much more money you can take in each year without putting in more of your own money, or borrowing more from the bank.

Small and big business owners alike should calculate their sustainable growth rates, and use them to determine whether they have adequate capital to meet their strategic growth needs. To calculate the sustainable growth rate, start by dividing your sales by your total assets to get the asset utilization rate. For example, if your sales are 25, dollars and your total assets are , dollars, your asset utilization rate would be 25 percent.

Next, divide your net income by your total sales to get the profitability rate. If your net income is 5, dollars and your total sales are 25, dollars, the profitability rate will be 20 percent.

Now, divide your total debt by your total equity to get the company's financial utilization rate. Once you've found the asset utilization rate, the profitability rate, and the financial utilization rate, multiply them all together to get your return on equity.

Then, find the dividend rate by dividing your net income by your total dividends. If your net income is 5, dollars and your total dividends is dollars, the dividend rate would be 0. Subtract your dividend rate from to get your business's retention ratio.

If your divided rate was 10 percent, your retention rate would be 90 percent. Finally, multiply your earnings retention rate and return on equity to arrive at your sustainable growth rate. For example, if your return on equity was 5 percent and your business retention rate was 90 percent, your sustainable growth rate would be 4.

For more tips from our Financial co-author, including how to compare your actual and sustainable growth rates, read on! Did this summary help you? Yes No. Log in Facebook. No account yet? Create an account. We use cookies to make wikiHow great.

By using our site, you agree to our cookie policy. Article Edit. Learn why people trust wikiHow. Co-authored by Michael R. Lewis Updated: February 21, This article was co-authored by Michael R. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas.

There are 5 references cited in this article, which can be found at the bottom of the page. Applying the Sustainable Growth Rate. Related Articles. Article Summary. Part 1 of Divide sales by total assets. This is the asset utilization rate - the number of sales you make each year as a percentage of your total assets.

Divide net income by total sales. This is the company's profitability rate, or the percentage of total sales that the business keeps at the end of the year after paying all of its expenses. Net income is sales minus expenses. Divide total debt by total equity. This is the company's financial utilization rate.

Calculate total equity by subtracting total debt from total assets. Example: Total Debt: 50, Total Equity: 50, Multiply the asset utilization, profitability, and financial utilization rates. Take the three percentages you just calculated and multiply them together. Divide net income by total dividends. This is the dividend rate, which is the percentage of your earnings you give back to shareholders.

If you own a small business, anything you take out for yourself at year end, in addition to your salary, is a dividend. This is the business' retention ratio, or the percentage of net income the business keeps for itself after it pays dividends.

The business retention ratio is important because it factors into the sustainable growth rate any amount you will be paying in dividends, and assumes that you will continue to pay dividends at that rate in the future. Multiply the earnings retention rate and the ROE. This is the sustainable growth rate. This figure represents the return on your business investment you can achieve without issuing new stock, investing additional personal funds into equity, borrowing more debt, or increasing your profit margins.

This business can increase the earnings it turns back into equity by 4. Part 2 of Calculate your actual growth rate. The actual growth rate in a company is simply the increase in sales over a given period of time. Divide the sales figure from your starting point by your most recent sales figure. The actual growth rate should be calculated based on the same time period used to calculate the sustainable growth rate.

Your actual growth rate will vary by month, quarter, or whatever period you use to report financial results. Because actual growth rate is just the percentage change in your sales, it changes frequently. When calculating the actual growth rate, take care that your sales figures represent the same amount of time each.

If you compare your sales from the 4th quarter of the year to the 1st month of the year, your growth rate will appear much larger than it actually is. Ensure your are comparing apples to apples, or more specifically, weeks to weeks, months to months, quarters to quarters, years to years, and so on.

Compare your actual and sustainable growth rate. Your business may be growing faster, slower, or just at the sustainable growth rate. As an example, imagine a construction company that builds houses.

After a year of sales the business owner calculates his actual and sustainable growth rates, and notices his actual growth rate is much higher than his sustainable growth rate.

As he has increases his sales, he needs additional funds to finance the costs of labor and materials to build additional houses in order to earn revenue. While these increase in sales may be good for business, the business owner won't be able to finance all of these costs without getting additional money from somewhere.

By knowing the differences in growth rates, the owner can plan ahead for where he will secure additional funding, or whether he should slow company growth. Most new business owners prefer not to borrow more debt or issue more equity in the beginning years, and may need to slow growth to the sustainable growth rate. Adjust your business. Use what you learned about your sustainable and actual growth rate to adjust your business plan.

If you want to maintain a growth rate that is higher than your sustainable growth rate, you will need to pay for the growth in costs somehow, before you can reap the increased income. Consider borrowing, issuing additional equity, investing personal funds, or reducing dividends.

Maintain perspective. Remember that growth rates are calculations based on past performance, and cannot perfectly predict the future. Your actual and sustainable growth rates will probably never perfectly match, and you should use the rates as a tool to guide business decision making, not a metric to paralyze your decision making or stunt your business. The sustainable growth rate gains more and more meaning as time passes and your business becomes more reliable - in the first year, your actual and sustainable growth rates may fluctuate drastically, which is expected.

Include your email address to get a message when this question is answered. Related wikiHows. About This Article. Co-authors: 8. Updated: February 21, Categories: Business Finances.

Article Summary X To calculate the sustainable growth rate, start by dividing your sales by your total assets to get the asset utilization rate. Italiano: Calcolare il Tasso di Crescita Sostenibile. Deutsch: Die nachhaltige Wachstumsrate berechnen. Thanks to all authors for creating a page that has been read , times. Reader Success Stories. AP Agnelo Pereira Sep 18, The article is crystal clear and made simple. Thanks a lot.

AK Ajay Kumar Mar 16, You can understand easily by reading the context and all the stuff. I'm sure it will be useful for many people.

The sustainable growth rate is an indicator of what stage a company is in, during its life cycleBusiness Life CycleThe business life cycle is the progression of a. [Sustainable growth rate = ROE × (1—dividend-payout ratio). Just as the break​-even point for a business is the 'floor' for minimum sales required to cover.

A sustainable growth rate is the rate a business can increase it's income without having to borrow more money from lenders or investors. As a small business owner, the rate represents how much more money you can take in each year without putting in more of your own money, or borrowing more from the bank. Small and big business owners alike should calculate their sustainable growth rates, and use them to determine whether they have adequate capital to meet their strategic growth needs.

The concept of sustainable growth was originally developed by Robert C.

According to PIMS profit impact of marketing strategy , an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, market growth, marketing expense to sales ratio [1] or a strong market position.

TOPIC: ESTIMATING SUSTAINABLE SALES GROWTH RATES

The sustainable growth rate is the maximum increase in sales that a business can achieve without having to support it with additional debt or equity financing. A prudent management team will target a sales level that is sustainable, so that the firm does not increase its leverage , thereby minimizing the risk of bankruptcy. When management wants to avoid taking on new financing, it can still grow sales by engaging in one or more of the following activities:. Shift the mix of sales towards more profitable products, which generate more cash flow to support additional sales. Doing so minimizes the need for working capital financing, which would otherwise increase in concert with an expanded sales level.

SUSTAINABLE GROWTH

Study Finance. Growth can be orderly or it can be unrestrained. Unrestrained growth can lead to less than optimal performance or even financial distress. DuPont Analysis focuses on the combined effect of profitability and turnover ratios. Simply, sustainable growth would be the realistic attainable growth that a company could maintain without running into problems. If sustainable growth is greater than actual growth, the company might be underperforming. If the actual growth rate is greater than sustainable growth, the company may run into trouble because of unrestrained growth. The return on equity, retention ratio and sustainable growth measures for the years in the previous example would be:.

Sustainable growth rate SGR is the maximum growth rate that a company can achieve without raising any additional equity but with additional debt just enough to maintain its existing debt to equity ratio.

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Sustainable growth rate

Companies who plan ahead and maintain sustainable growth rates will ultimately circumvent unprofitable growth. Thus by managing the growth rate, companies can avoid straining financial resources and overextending their financial leverage. Rapid growth and increased sales are dependent on financial resources. By using the return on equity and dividend payout ratio , the SGR then enables firms to forecast future equity and develop optimal growth rates. Calculate the sustainable growth rate using the following two equations. When you use the Return on Equity and dividend -payout ratio, you should use the following SGR formula:. The second equation to calculate the sustainable growth rate is to multiply the four variables for profit margin , asset turnover ratio, assets to equity ratio, and retention rate:. P is the Profit Margin net profit divided by revenue. Whereas, R is the Retention Rate 1 minus the dividend payout ratio. And A is the Asset Turnover Ratio sales revenue divided by total assets. First, calculate SGR by multiplying one minus the dividend-payout-ratio by the return on equity. Learn other ways to increase the value and cash flow of your company by downloading the free 25 Ways to Improve Cash Flow whitepaper. The step-by-step plan to set your prices to maximize profits. Not a Lab Member? This has actually been able to present those who still smoke a Crown Lion e Cig Kofte is included.

Sustainable Growth Rate – SGR

Not necessarily. In order for a business to grow without unnecessary financial and operational hurdles, it must develop at a rate which takes into consideration the consequences of increased sales volume and staff, while remaining consistant with the methodology that made the business possible. Calculating the sustainable growth rate for your business can help you plan for the future and reduce the danger of becoming over-leveraged. In order to define the sustainable growth rate for a particular business, shareholders must first identify the maximum growth rate their business can achieve without having to increase financial leverage or debt financing. Stated another way, it's the growth that can be achieved given the company's current profitability , asset utilization , dividend payout , and debt ratios. The breakeven point is the "floor" for your sales growth. This is the absolute minimum in sales you need to make in order to stay in business.