Business growth may be viewed as a feasible step especially when it is faster. However, it is not necessary as the company may run into financial problems and to avoid such problems it has to move a sustainable growth rate. In this sense, the business should be able to apply debt and debt in financing its growth. Thus, if the growth is fast and there are inadequate funds the company may experience difficulties in sustaining growth. On the other hand, too much slow growth will stagnate. The sustainable growth rate is the growth rate that the company can achieve without having to strain its resources through debt financing. Further, it is an important concept that should be used by the company in identifying the breakeven point. At this point, it is the minimum revenue that should be generated for the business to remain operational. On the other hand, the sustainable growth rate can be interpreted as the maximum revenue of the business. Notably, the growth can take place without much exhaustion of the cash or new financing.
Sustainable Growth Equation
The equation of sustainable growth rate involves measuring the profitability or return on equity and dividend payout ratio. Therefore, the equation multiplies the company's ROE by its plow back ratio which is equal to dividend payout ratio minus one. Additionally, the sustainable growth rate can be obtained by multiplying four operational variables which include a profit margin, assets to equity ratio, asset turnover ratio, and retention rate (SGR=PART). Profit margin is the net profit divided by the revenue; retention rate is one minus the dividend payout ratio. Asset turnover is the sales revenue divided by total assets while an asset to equity ratio is the total assets over the shareholder’s equity. The result of the sustainable growth equation will then be used in making the adjustment for the business.
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Alternative funding if the company grows too fast
In the cases where the business has a continuous increase in growth at a very high rate, it is important to assess whether the growth is long term or short term. Thus, in the event where the growth is long term, the company is in a position to liquidate new equity, enhance financial control and lastly lower its dividend payouts. Similarly, in the effort to retain more income, the company may outsource and increase their prices or create a partnership with a more stable company. However, when making the link up, it is important and teaming should result in win-win situations.
Alternative funding if the company grows too slow
In every business, deciphering whether the growth is long term or short term is important. Thus, an internal review is necessary for determining whether the problem can be improved. The overview involves undertaking the analysis of the current business performance. After the overview, the business should focus on the option that seems to be most logical. At this point, the company will be forced to increase expenses as well as creating the organization growth. Additionally, if this alternative fails the funds can be distributed to the shareholders; review the stock prices and wait for the price to decrease. However, the best option would be to redistribute the funds to the shareholders. Notably, it is important to ensure that the business is running efficiently before pursuing any growth strategies.
References
Investopedia, L. (2015). Sustainable Growth Rate-SGR. Retrieved April 29, 2015, from Investopedia: hTp://www.investopedia.com/terms/s/sustainablegrowthrate.asp
Morningstar, I. (2015). How to Calculate the Sustainable-Growth Rate. Retrieved April 29, 2015, from Morningstar.com: hTp://news.morningstar.com/classroom2/course.asp?docId=3071&page=2&CN=C
