How Do You Measure Business Growth?

Posted on Oct 25, 2016

By Guest Contributor, Dean Kato

“Our sales team has achieved 5% year-over-year growth every year for the past three years. We’re very pleased…” But should we be?

You’ve likely heard the saying, “a rising tide lifts all boats.” While there is a great deal of controversy regarding whether or not a growing economy results in individual company growth, there is no question that overall spending patterns increase as economies become healthier. It is also widely accepted that demand for products and services results more from changes in the market overall, than from our own sales acumen. So how do you measure business growth?

There are many analytical ways to measure growth. A classic, easy method is to compare year-over-year top line revenues, which we will focus on here, instead of profit margins. By this method, it’s possible to create 5% revenue growth by simply raising prices 5% and selling the same volume of product or service. While this is a viable option for achieving tangible financial growth, it may be worth asking yourself, “Does this model accurately track and meet our growth plans?” It is important for your company to be able to measure meaningful growth parameters and establish growth goals.

Many industries remember 2008 as a “crash” year. The consequent recession spurred a period wherein many companies were lucky to merely maintain past year sales trends. Two examples of markets that did not follow that trend, however, are the cruise industry and GDP in India.

Niche Industry Growth

The cruise industry has seen steady growth, measured in passengers per year, for the past 20+ years. Worldwide growth was 5.7% in 2008 and 9.1% in 2009 – just when many companies were struggling to stay in business. During this period, some industries measured success in limiting the freefall of sales and others continued to operate in growth sectors.

Recognizing industry-specific trends is key to understanding what your company’s growth should look like. For example, if a cruise operator accepted nominal growth in the years following 2008, thinking that the recession was affecting spending, they would have been settling for lower performance than industry norms.

Demographic Growth

India never noticed 2008. Although the recession affected many countries outside the US, industry growth in India (after a very small and short correction) continued unabated. And while GDP growth flattened globally in 2011, India saw record growth rates between 2008 and 2011.

Micro economies within the US are also influenced geographically. For example, although growing now, Michigan’s post-recession economy has recovered much more slowly than most of the West Coast.

Acquisition

Growth by acquisition is another common, more obvious, strategy. The key to successfully measuring performance is being able to segregate performance of the legacy company and performance in the acquisition. This allows company owners to measure the organic growth within each entity. If all performance is measured immediately as a single company, it is difficult to determine how the legacy and acquired company are performing independently.

Competition

Comparing how your company is doing in relation to your competitors can be a valuable tool for measuring comparative performance in your industry niche. If we establish a 5% growth goal based on overall economy growth, but neglect to include comparison to peer companies in our market space, we are ignoring a critical component. During periods of high industry growth, we may be “leaving money on the table” if we ignore competitive performance.

For example, the immense wireless communications industry thrives or dies based on competition. Twenty years ago, the increase of new online users lead to a significant growth in the industry. The relative affordability of equipment and services (who pays for long distance anymore?) has created an industry that emphasizes stealing customers from competitors more than creating actual new users. An indication of this trend is the ubiquitous offer many carriers make to “pay your termination fee.”

Absolute Growth

Year-over-year organic growth is, and should be, a measure defining company growth. The data to establish absolute growth (percentage growth of revenue, this year over last year) can be found in internal reporting. It does not require studies or conjecture regarding industry trends, geography, or competition.

We must keep in mind that using only an arbitrary, straight-line growth goal model is a disservice to our company; we are either setting up unreasonable, lofty goals or allowing ourselves to be satisfactorily underperforming.

In Summary

Regardless of how it’s measured, growth is critical to the sustained health of a company. The adage “sales growth cures all ills” has more than a small ring of truth. It is unusual for a company to have static revenues continually – it either grows, goes out of business, or is acquired at a discount! Understand your market trends and pressures. Dig into what competition is doing. Use data that measure several different parameters to establish aggressive, but achievable, growth goals.

© 2016 Clark Nuber PS All Rights Reserved

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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