Building Your Business Operations & Success Sustainable Growth for a Business It's important to grow your business carefully By Rosemary Carlson Updated on September 13, 2022 Fact checked by Taylor Tompkins Photo: Thomas Barwick/Getty Images They say the faster your business can grow, the better. But that's not necessarily true. In order for a business to grow without unnecessary financial and operational hurdles, it must develop at a rate that takes into consideration the consequences of increased demand. Inventory and staff would need to be increased to keep consistency with the methodology that made the business in demand to begin with. Calculating the sustainable growth rate for your business can help you plan for the future and reduce the danger of becoming over-leveraged. Key Takeaways Your sustainable growth rate is the rate at which your company can grow without requiring more funding or presenting operational hurdles.While your sustainable growth rate is the ceiling of sales growth, the breakeven point is the floor. The sustainable growth rate should help you determine how to keep your company functioning smoothly while growing sales—and identifies when you may need an infusion of cash. Maximum Growth Rate In order to define the sustainable growth rate for a particular business, shareholders must first identify the maximum growth rate their business can achieve without having to increase financial leverage or debt financing. Stated another way, it's the growth that can be achieved given the company's current profitability, asset utilization, dividend payout, and debt ratios. Floor and Ceiling of Sales Growth The breakeven point is the "floor" for your sales growth. This is the absolute minimum in sales you need to make in order to stay in business. Think of the sustainable growth rate as the "ceiling" for your sales growth. It's the most your sales can grow without new financing and without exhausting your cash flow. Growth Capability and Growth Strategy Finding a sustainable growth rate for your business is complicated, as you must consider the external factors that could interfere with business growth, including politics, economics, and consumer trends. Note If the environment in which you do business is highly saturated with competition, you may have to create additional value through your product or service in order to grow within the market. You will also need to address two primary issues: growth capability and growth strategy. Growth capability refers to your firm's infrastructure: computers, office space, and personnel. Is there room to grow your sales without adding additional infrastructure? Growth strategy refers to the comprehensiveness of your business plan. Unless you have both of these goals understood and documented, long-term growth will be elusive. Sustainable Growth Model You business is never going to turn down additional sales—so how do you handle more work, and while balancing greater demands from your clientele and your team? You have several options: Sell equity in order to raise new money.Raise more debt financing.Reduce dividend payments to shareholders.Increase your profit margin.Decrease your total asset turnover. Here are some challenges that go along with each option: Selling new equity dilutes the owner's shares.Raising more debt pushes the firm nearer to bankruptcy.Reducing dividends always makes shareholders unhappy.Increasing the profit and decreasing asset turnover are long-term strategies that can take months or even years to overcome. Note Mature firms often have sustainable growth rates somewhat less than their maximum rate. They distribute their excess cash to shareholders or put it to work in investments. Sustainable Growth Rate Calculation The formula for a sustainable growth rate is: SGR = Retention Ratio X Return on Equity where: Retention Ratio = 1 - dividend payout ratio and Return on Equity = Net Income/Total Shareholder's Equity The retention ratio is the flip side of the dividend payout ratio. If the firm pays out 20% of its earnings in dividends, then its retention ratio is 80%. The Return on Equity (ROE) is what the firm earns on the shareholder's investment in the firm. Multiply the two together, and you have the sustainable growth rate. Frequently Asked Questions (FAQs) How do I increase the sustainable growth rate of my company? To increase your sustainable growth rate, you need to get more breathing room financially. You can do this by using debt, reducing dividends, or issuing equity. You can also make your revenue more efficient. What is a good sustainable growth rate? Your sustainable growth rate is unique to your business and is impacted by a variety of factors. However, the most common sustainable growth rates are often between 15% and 20%. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Accounting Tools. "Sustainable Growth Rate Definition." International Centre for Trade and Sustainable Development. "How Can The Company Increase Its Sustainable Growth Rate."