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How To Determine Your Business' Growth Rate

Growing a business quickly may seem like the best idea, but remember that slow and steady is often what wins the race.

By Robert CordrayPublished 4 years ago 4 min read
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Growing your business is an exciting time and often a cause for celebration. However, it is also lots of work that requires future planning as well. After all, you need to determine about how fast your company is growing if you want to ensure you have enough products, advertise well, and have the manpower to keep your clients happy. This means you need to predict your business growth rate and reassess it often to ensure you stay on track. Doing so requires knowledge of specific terms and how to implement them into your sales forecasts.

Create a Baseline

A baseline helps you determine how your company developed to date and, assuming it's been consistent, helps you forecast how it may develop in the future. To create your baseline, you'll need to collect a history of your sales and finance data. The baseline includes fixed expenses, variable expenses, a product line breakdown of your sales revenue, and calculations for both profit margin and gross margin. You'll also need to consider any interest rates you're paying on any financing you have. Expenses and sales create direct business forecasts, while interest rate and margins allow you to create comparison points.

Determine Your Expenses

Focus on your expenses before your revenue. Expenses aren't as likely to change as revenue, which can grow or shrink by the month. Divide your expenses into fixed costs and variable costs. Fixed costs are expenses that don't change month to month, such as rent and utility bills, advertising and marketing, and how much you pay your employees. Variable costs include supplies and packaging, direct sales, and customer service costs. When forecasting expenses, good rules of thumb include doubling your marketing estimates, tripling your legal estimates, and tracking your direct sales as a direct labor expense.

Understand Key Ratios

Simply knowing which ratios to focus on isn't enough. You need to understand what they mean as well. In this case, you must understand your gross margin, operating profit margin, and total headcount per client.

Your company's gross margin is the ratio of your direct costs to your revenue during a specific amount of time, such as a quarter or a financial year. Consider whether any aggressive assumptions cause your numbers to become too high here. Keep in mind that a high expense now will likely still be too high in the future.

Next, consider your operating profit margin. This is your ratio of total operating costs (except for financing) to your total revenue during the same period of time used for your gross margin. As your revenue grows, your operating profit margin should as well. However, avoid the trap of forecasting a too-early break-even point, which could cause you need to secure more financing.

FInally, consider your total headcount per client. This is especially important if you're a solo entrepreneur and don't intend to work with others as you grow your business. Divide the number of employees (so, if you are alone, just one) by the number of clients you work with. Do you want to be handling that accounts in the future, or would you prefer more or less on your plate? Consider this when forecasting your future payroll expenses.

Calculate Your Monthly Recurring Revenue

Many financial experts consider your monthly recurring revenue to be your most important financial metric. This is because it's a predictable, recurring metric that can help you assess both short-term and long-term revenue projections. By tracking recurring revenue based on regular sales, you can further track whether you are gaining or losing business overall. Imagine you gain a new $50,000 contract. While this should be celebrated, do so with caution. This is because any loss in regular income will take away from that new contract. If you lost a $20,000 account, for example, your gain for the month was actually only $30,000.

Invest in a Customer Relationship Management Tool

Finally, you need to have the right customer relationship management software. The best CRM for small business will include the ability to create sales forecast reports. Use CRM sales reports to generate forecasts on demand, adjust estimates to be more conservative or aggressive (the best idea is to have one of each), and to identify your top leads so that you can provide enough resources for them. There are dozens of CRM applications available, so be sure to research thoroughly before settling on one. Doing so ensures you find the one that best meets your needs and provides the functionality you want in all departments.

Growing a business quickly may seem like the best idea, but remember that slow and steady is often what wins the race. Create sales forecasts often, adjust them accordingly, and avoid biting off more than you can chew. By acting and investing responsibly, you are more likely to have a company that will thrive for years to come.

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