When you understand the difference between linear and exponential growth, you can apply these concepts to line items within forecasts for the balance sheet, income statement, and cash flow statement for your small business. Linear growth means that grows at the same unit amount over equal time periods.
- Example 1 (plus two each year): 100, 102, 104, 106, 108
- Example 2 (plus five each year): 25, 30, 35, 40, 45
Exponential growth means that an item grows at the same rate over time periods.
- Example 3 (10% growth each year): 100, 110, 121, 133.1, 146.4
- Example 4 (30% growth each year): 100, 130, 169, 219.7, 285.6
With exponential growth, the previous increases also increase each year, which is precisely what makes it a compounding effect. Study your business’s past results to identify which line items are exponential and which are linear, and project forward from there for more accurate forecasting.