What is Sustainable Growth Rate and How to Calculate SGR
‘Sustainable Growth’ is a widely used term. But what it means in context with business is still unclear. Could it mean business with corporate social responsibility? Or is it green business practices that will achieve sustainability?
Well, in the context of the stock market, Sustainable growth is the realistically attainable growth a company can achieve without running into problems. For any company or business, sustainable growth is an indicator that the company is doing well. In a fast-growing economy such as ours, Inflation is a problem all businesses face, especially when it comes to sustainable economic growth. Companies expand their operations rapidly and find it challenging to fund that growth. That’s why achieving and maintaining a Sustainable Growth Rate is very important for any company or business.
But what exactly is a Sustainable Growth Rate?
A company’s Sustainable Growth Rate (SGR) is the maximum growth rate that a company can sustain without having to finance growth with additional equity or debt. In simpler terms, finding the Sustainable Growth Rate for a company will answer the question – How much can this company grow before having to borrow money?
Sustainable Growth Rate is also an indicator of three important things
1) It indicates what stage the company is in its life cycle
2) It can help with decisions to be made regarding strategy, finance, and dividend payout
3) Creditors can use Sustainable Growth Rate to assess a company’s creditworthiness
How to Calculate Sustainable Growth Rate?
To calculate Sustainable Growth Rate, you need to know how profitable the company is as measured by its return on equity (ROE). The formula to calculate Sustainable Growth Rate is
Sustainable Growth Rate = Retention Rate x Return on Equity
Retention Rate: This is the percentage of earnings that the company has not paid out in dividends. In simpler terms, how much profit a company retains (Net Income – Dividends) is equal to Retained Earnings
Return on Equity – This represents the returns shareholders have received relative to the profit the company has generated. To calculate, divide ‘Total Shareholder’s Equity’ by ‘Net Income’ of the company.
While Sustainable Growth is essential on the company level, it also fuels Sustainable Economic Growth, necessary for the country on the whole. It enables a country’s economy to grow sustainably to preserve it for future generations. Sustainable economic development will provide means for the nation to prosper without depleting natural resources or jeopardising the country’s future.
7 Fundamentals of Sustainable Growth for Businesses
Creating long-term value and goodwill with limited resources is a challenge every entrepreneur must face. These are some key fundamentals that will help you achieve Sustainable Growth for your business.
1) Have a clear purpose – Businesses without a vision are like a path with no destination. It’s imperative to know what you want your business to achieve and why. The difference between successful and unsuccessful companies is that successful companies have a clear purpose.
2) Partnership & Collaboration – Understandably, you want to be hands-on with every aspect of your business. After all, it is your business. But understand that Sustainable growth is not a one-person job. It’s the result of partnership and collaboration. You’ve hired people because they’re good at what they do. Micro-managing will not just result in disgruntled employees but will also result in you taking on more than you can handle
3) Build a strong brand – A successful company is the one that has a substantial brand value. It has people who are attached to it and have a connection to it. Building secure relationships are beneficial to your company’s sales number which in turn impacts your company’s Sustainable Growth Rate.
4) Customer retention and satisfaction – Did you know that acquiring a new customer base can cost your company five times the amount you would spend on retaining them? Statistics show that a minimum of 2 percent increase in customer retention would decrease a company’s cost by as much as 10 percent. To achieve Sustainable Growth, companies ought to start looking at their existing customers as leads and prospects and figure out strategies in which they can gain new business from old customers. Conduct customer surveys and ask them for feedback after every interaction. That will enable you to get a clearer picture of where your company stands when it comes to customer satisfaction.
5) Repeatable sales – It’s not enough to develop a great product that ensures through-the-roof transactions for one time. For active sustainable growth, you must devise a strategy in which you repeatedly achieve immaculate sales but at a much larger scale. One of the ways to make this happen is to put your clients on a retainer model instead of getting them to pay for each sale.
6) Evaluate and revise your strategy – In a dynamic economy like ours, businesses need to evolve and adapt to changing circumstances. You have a business plan that works for you. Great! But sticking to the same methodology without evaluating the merits or including room for growth is a recipe for disaster. Evaluate your strategies regularly and make a note of which ones work best for you and the ones that may not. According to experts, companies who continuously analyse the information they hold and use it to their optimum advantage outperform their peers by up to 20 percent.
7) Add Value and Innovate – In today’s market place, the only way to stand out from the crowd is by doing things differently or by offering something others don’t. The key to sustainable growth is to focus on Research & Development and innovate as quickly, efficiently and cost-effectively as possible. Make small changes which lead to more significant breakthroughs. Making your business sustainable is more than just generating profits. It’s customer satisfaction, company and community growth and the value your company brings to people’s lives.
Be it a small business or a large corporate house, achieving a Sustainable Growth Rate for your company should be on your list of must-dos. It is one of the critical parameters that will determine the performance of your company in the longer run. However, achieving this is no simple task owing to the constantly changing political, economic, social and consumer trends.
Develop a game-plan based on these fundamentals, and you will be one step closer to successfully achieving a Sustainable Growth Rate for your business.