Sustainable Sales Growth

Q: How can your business make more money?

A: Increase sales.

Simple, right?

Not so fast, Speedy. Growing too much, too fast can put a strain on your cash flow. Strain it excessively, and you will have grown yourself out of a job.

Here is a simple formula to help you determine how much growth is safe to pursue given your current operating cash flow:

net income / (net worth – net income)

I know, I’m making you do the math. But even the most math-shy among you should be able to crank this one out.

For example, Last year, say your company had a net income of $275,000. And say you ended the year with a net worth of $2,500,000. Your Sustainable Growth Rate would be 275,000 / (2,500,000 – 275,000) = 12%.

If you grow more than 12%, you will need to free up some cash. And unless you have a rich uncle, this could mean increasing debt, cutting operating costs, or raising prices. Any cash-freeing strategy requires careful consideration and carries the risk of sabotaging your progress.

It’s worth noting that this formula assumes that your organization’s current performance is desirable.

If this is not the case, that does not mean you’re unworthy of considering sustainable sales growth. It just means that the formula is of limited use to you at this moment.

We hope that — soon — you’ll be saying “Gahhh! I’m growing too quickly! I’m far too awesome! Slow down!” (P.S. Want to get there faster? We have a few ideas for you.)

Don’t stop here.  Be sure to check out some of our other accounting resources.