What’s your current growth rate?
“Growth is never by mere chance; it is the result of forces working together.” — JC Penney
Of all the financial metrics, in all the towns, in all the world; your growth rate should come first.
Nearly every move you make in business will flow downhill from whether you’re growing or not. Let’s take a look at:
- The importance of growth (why this matters)
- The 4 types of growth
- Calculations
- Creating your growth algorithm
Why do you NEED to grow?
I’m sure you’ve heard about this thing called inflation; and you’ve probably heard about the declining purchasing power of a dollar (yes, your cup of coffee is more expensive today).
Let’s say you have a goal of making $100k per year in profit or salary. And once you achieve that goal you decide to live life to the fullest while taking your foot off the gas in your business (i.e. stop pushing for growth).
What happens to that $100k profit/salary in 10 years?
If inflation continues as it has for the past 10 years, then your $100k salary will turn into $73k. Ouch.
Use this as a reminder when 2026 rolls around and you’re hesitant to push through those prices increases for next year!
The 4 axes of growth (definitions)
When reviewing an investment or acquisition, I’m defining growth across 4 dimensions:
- Long-term trends — Pull up 5-10 years of P&L or sales data and check your revenue trends. These yearly growth rates (%) are your long-term growth trends.
- Medium-term trends — Pull up the last 6 months of P&L and compare each month to the same month last year. Those year-over-year (YoY) growth rates are your medium-term growth trends. If 5 out of 6 show positive growth, then you have a consistently growing business.
- Short-term trends — What were YoY sales for each of the last 6 weeks? These are your short-term growth trends (6 weeks = ~1.5 months).
- Industry outlook — This requires some investigation and intuition. Some internet searching and sleuthing can you help you find future industry growth predictions. This is how the market perceives your business/industry.
Note: I’m only looking at top line revenue when referring to growth here. Technically revenue is a combination of price ($) and volume (#).
We can loosely compare each of these axes to get a blended feel for our business’ growth trends. If long-term growth is >5% but medium-and-short-term growth is 1%, then growth trends are slowing down.
Calculating growth
Some definitions you’ll need:
- Year-over-year growth (YoY) = period sales ÷ prior year period sales -1 [month, quarter, or year]
- Month-over-month growth (MoM) = monthly sales ÷ last month sales -1
- Compound annual growth rate (CAGR) = (ending ÷ starting) ^ (1 ÷ years – 1)
Here’s a quick example…
My business was doing $100 in sales 5 years ago and it’s $1,000 today. That is 900% total growth [$1000 ÷ $100 = 10 – 1 = 9 or 900%].
The 5-year CAGR = 78% per year (incredible). [$1000 ÷ $100 ^ (1 ÷ 4) = 1.778 or 77.8%]
Last year sales were $950 = 5.3% growth [$1000 ÷ $950 = 1.0526 – 1 = 5.3%].
Over the last 6 months, my YoY growth was 5%, 1%, 3%, 9%, 4%, and a 2% decline. That’s 2.5% average growth.
The last 6 weeks were 1%, 2%, 5%, 5%, 2% decline, and 1% decline. That’s 1.7% average growth.
Blending these together, my long-term growth is 78%, last year was 5.3% growth, the last 6 months were 2.5% average growth, and the last 6 weeks were 1.7% average growth.
What do you think about these trends, any concerns?
This looks like a classic deceleration in performance (78% > 5.3% > 2.5% > 1.7%). A great “investigation” signal.
Creating your “growth algorithm”
Big public companies use terms like “growth algorithm” to describe to investors how much they plan to grow in the future. We can steal their playbook and do the same!
First, find out where you’re currently tracking by calculating your long, medium, and short-term growth rates. This is your baseline. In theory, if you were to change nothing, these are the growth rates you could expect in the future.
From there, start looking at how you’ll increase the key inputs to revenue:
[Revenue = Customers x Average Order Value x Orders]
- Use price increases and/or upsell + cross-sell to increase average order value
- Your sales and advertising efforts bring in new customers (via leads)
- Increase volume by adding or developing new products or services