Businesses consider growth to be a good thing and it is better for a business to grow more and faster. However, for businesses to grow and at the same time avoid running into financial problems, it needs to grow at a rate that is sustainable ( Rajagopal, 2016) . It is vital for businesses to be able to finance their growth with either equity or debt financing. In case there is no enough financing, but have runaway growth then businesses would find it hard to get the necessary financing to ensure that there is sustainable growth. To take advantage of sustainability growth, it is vital for businesses to understand the meaning of sustainability growth.
Sustainability growth
Sustainability growth is considered to be the attainable growth that is realistic, which a business can maintain without having the risk of running into problems. It is also defined as the maximum level of growth that a business is able to achieve before it has to borrow or raise money. It is vital to understand and calculate the rate because it helps the company understand if it needs to borrow or raise money in the future. It also helps businesses determine if they can sustain themselves in the long term. It is a concept that is especially crucial for startup companies ( Gleadle, 2011) . Companies often calculate the sustainable growth rate when they want to determine the sustainable growth.
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Sustainable growth equation
The sustainable growth rate of a company is the return on equity (ROE) and the percentage of the profits that are brought back into the business. The equation of calculating the sustainable growth rate is;
ROE x (1-dividend payout ratio)
The assumption in the calculation is that the sustainable growth rate calculation is aiming at maintaining a target capital structure of equity and debt, improve the sales, and maintain a dividend payout ratio ( Research in Entrepreneurship and Small Business Conference, 2008) . It is vital to understand that the growth of a company can either be too fast or too slow, thus interfering with sustainable growth rate.
A case when growth is too fast
There are cases in which the growth in a company is too fast. In such a case then the company needs to develop a financial strategy that aims at selling more equity, reduced the dividend payouts, increases the level of financial leverage through debts, decreases the ratio of an asset to sales and increases the profit margins. These efforts are likely to increase the sustainable growth rate.
A case when the growth is too slow
If the company grows too slow then it is bad for the company because often it is an indication that the company that was once fast-growing might be facing trouble. It is often an indication to investors to bail out because often they do not want to have stock in a company that is about to fall or whose main product is falling in terms of a number of sales. The best step that will help in maintaining the stock price is stabilizing the growth in earnings.
Conclusion
The sustainable growth rate is vital for any company because it helps companies to determine the maximum growth rate that it can be able to sustain without looking for financing outside and without increasing the financial leverage. The growth rate of a company can be either too slow or too fast which can have negative effects on the sustainable growth of a company.
References
Gleadle, P. (2011). UK bio-pharma: innovation, re-invention and capital at risk. Institute of Chartered Accountants of Scotland.
Rajagopal, (2016). Sustainable Growth in Global Markets: Strategic Choices and Managerial Implications .
Research in Entrepreneurship and Small Business Conference, Landstro ̈ m, H., & European Council for Small Business and Entrepreneurship. (2008). Entrepreneurship, sustainable growth and performance: Frontiers in European entrepreneurship research . Cheltenham, UK: Edward Elgar.
