What are growth rates?
The label “growth rate” is broad in that it refers to the change of a specific variable over a predefined time period. Owners typically express growth as a percentage. Growth rates can provide you with a more accurate depiction of financial health, especially when comparing percentage growth to industry rates.
Narrowing growth rate down to a percentage will level the playing field so that you can measure yourself against others in the industry. For instance, imagine you’re a small business selling a new tech product. If you were to compare your revenue to established tech firms, you’d probably find yourself lagging considerably.
But, if you notice that your yearly growth rate percentage is significantly higher than the growth rates of other firms, you can conclude that you’re more efficient with resources and have a more successful product.
The standard growth rate formula is straightforward. If you’re looking to use it to measure future value, the equation expressed in percentage form is:
Projected growth rate = ((Targeted future value – Present value) / (Present value)) * 100
So, let’s say that you are currently producing $50,000 in sales but want to reach $125,000. Your growth rate formula would be:
Growth Rate (Future) = ($125,000 – $50,000) / ($50,000) * 100 = 150%
This formula merely shows that you need to grow by 150% to meet your goal. You can also add time periods to the equation. All you need to do is divide your calculated growth rate by the number of periods you’d like to measure. This is called the annual rate.
For example, imagine that you want to grow to $125,000 in sales within three years. You’d like to figure out the monthly growth factor. Divide 150% by 36 to yield a monthly growth rate of 4.17%. You’ll need to exhibit a positive percentage change of 4.17 per month if you wish to hit your sales goal on time.
You can also calculate the growth rate as a measure of past performance. In these situations, the equation is:
Growth rate (past) = ((Present value – Past value) / (Past value)) * 100
If you add the number of periods into the equation, this allows you to determine the percentage increase or decrease that you displayed over any number of years.
Now that we’ve covered growth rates at the most basic levels, let’s look at in-depth ways to comprehend them. There are two different ways to understand growth rate — average annual growth rate and compound annual growth rate.