As a business owner or investor, being able to accurately calculate your company’s growth rate is an essential financial analysis skill. Your company’s growth rate shows the percentage change in key business metrics like revenue, profits, and customers over a set time period.
Tracking growth allows you to benchmark performance, set targets, forecast future results, and communicate progress to stakeholders. This comprehensive guide will walk you through the step-by-step process to calculate your company’s growth rate using common financial metrics.
Why Growth Rate Matters
Being able to quantify your company’s growth rate provides many benefits
- Evaluate historical performance trends
- Understand key growth drivers and success factors
- Set realistic growth objectives and operating plans
- Forecast future financial results based on past growth
- Assess investment opportunities and acquisition targets
- Communicate progress to investors, shareholders, and employees
- Benchmark against competitors and industry averages
- Identify areas for improvement based on growth differentials
In short, knowing your accurate growth rate helps guide both strategic and operational decisions to improve results. It provides an objective view of what’s working well and what needs more focus. Now let’s look at how to calculate it.
How to Calculate Revenue Growth Rate
Revenue growth rate measures the percentage increase or decrease in total company sales over a set period of time. It is one of the most common growth metrics used. Follow these steps
Step 1: Determine Time Period
Select the time frame you want to analyze, such as quarterly, annually, or a custom multi-year period. Be consistent in comparing equal periods.
Step 2: Identify Revenue Totals
Pull total revenue numbers from financial statements for the beginning and end of your chosen time period.
Step 3: Insert into Formula
- Beginning Period Revenue
- Ending Period Revenue
- Plug the two revenue totals into the growth rate formula:
Growth Rate = (Ending Revenue / Beginning Revenue) – 1
Step 4: Convert to Percentage
The result will be in decimal format. Convert to a percentage by multiplying by 100.
Calculating Profit Growth Rate
Profit growth tells you how efficiently your company is generating earnings from revenue. Do the same steps as above, but substitute net profit for revenue.
Net profit metrics to use include:
- Net Income
- Operating Profit
- EBITDA
- Gross Profit
Calculating Customer Growth Rate
For customer-based businesses, tracking customer growth rate is key. Follow the same process, but replace revenue with the number of customers or clients.
Metrics to use include:
- Active customers
- New customers acquired
- Customer churn rates
- Average revenue per customer
Tips for Calculating Growth Rates
Follow these tips when determining your company’s growth rates:
- Use year-over-year comparisons for simplicity
- Calculate on both a quarterly and annual basis
- Show growth rates as a percentage, not decimal
- Check formulas and data points for errors
- Eliminate one-time events that skew results
- Look at 3-5 years of history to identify trends
- Compare growth rates across key metrics
- Factor in industry and economic conditions
- Confirm your math with a financial analyst
Revenue Growth Rate Example
Let’s look at a quick example to make this even more clear. Suppose your SaaS company had the following simple income statement:
FY 2020
Revenue: $1,000,000
FY 2021
Revenue: $1,500,000
To calculate the revenue growth rate between these two periods, we would take:
Ending Period Revenue = $1,500,000
Beginning Period Revenue = $1,000,000
Plug into formula:
Growth Rate = ($1,500,000 / $1,000,000) – 1
= 0.5
= 50%
Therefore, the company grew revenue by 50% between 2020 and 2021 fiscal years.
Common Growth Rate Benchmarks
As a general rule of thumb, here are common growth rate benchmarks for privately-held companies:
- 10% to 25% = Average acceptable growth
- 20% to 50% = Very good, above-average growth
- Over 50% = Exceptional growth, but hard to sustain long-term
However, these vary significantly by industry, economic conditions, and company stage. Use benchmarks just as a general guide.
Forecasting Future Growth
Once you know your historical growth rates, the next step is forecasting future growth.
To predict future growth rates, analyze:
- Historical growth over past 3 to 5 years
- Expected market conditions for your industry
- New products or services you plan to launch
- Changes in cost structure or pricing
- Competitive landscape
- Economic outlook
- Management objectives and key initiatives
Taking all these factors into account will allow you to set realistic growth targets and build your financial projections.
Be conservative in your forecasts and avoid simply extending straight-line historical growth. Strategic planning, not extrapolation, should guide your growth assumptions.
Presenting Your Growth Rate Data
When sharing growth rate data with stakeholders, best practices include:
- Show historical growth rates over multiple time periods
- Highlight key takeaways and insights
- Identify your biggest growth drivers
- Provide proper context around your figures
- Be factual and let the data speak for itself
- Use charts and graphs to visualize trends
- Share both actual results and future targets
Well-presented growth data helps align your team around common objectives. It also positions your company positively with investors to attract capital for expansion.
Why Consistent Growth Matters More Than Size
When evaluating companies, sustainable growth over time is far more important than current size or short-term results. Rapid unsustainable growth often masks underlying problems.
Focus first on disciplined growth driven by serving genuine customer needs. Growth will then become an output of doing the right things, rather than an end unto itself.
Key Takeaways on Growth Rate
Here are some key points to remember about accurately calculating and presenting your company’s growth rate:
- Use year-over-year comparisons for easy analysis
- Look at both revenue and profit growth rates
- Consider customer growth for consumer businesses
- Check your work to avoid formula errors
- Eliminate one-time anomalies that distort results
- Review multi-year trends rather than isolated data points
- Set future targets based on historical baselines
- Be factual and context-driven when sharing externally
- Emphasize customer value creation over growth alone
Monitoring both historical results and future projections will provide tremendous insights into the overall health and trajectory of your business.
What matters most isn’t touting impressive growth numbers, but rather understanding the reasons and factors behind your growth. Ultimately, sustainable growth stems from consistently improving customer experiences and executing on a focused growth strategy.
Compound Annual Growth Rate (CAGR)
The compound annual growth rate (CAGR) is a variation on the growth rate that is often used to assess an investment’s or company’s performance. The CAGR, which is not a true return rate, but rather a representation that describes the rate at which an investment would have grown if it had grown at the same rate every year and the profits were reinvested at the end of each year. The formula for calculating CAGR is:
C A G R = ( E V B V ) 1 n − 1 where: E V = Ending value B V = Beginning value n = Number of years begin{aligned} &CAGR= left ( frac{EV}{BV} right ) ^{frac{1}{n}}-1\ &textbf{where:}\ &EV = text{Ending value}\ &BV = text{Beginning value}\ &n = text{Number of years} end{aligned} CAGR=(BVEV)n1−1where:EV=Ending valueBV=Beginning valuen=Number of years
The CAGR calculation assumes that growth is steady over a specified period of time. CAGR is a widely used metric due to its simplicity and flexibility, and many firms will use it to report and forecast earnings growth.
How to Calculate Growth Rates
Growth rates can be calculated in several ways, depending on what the figure is intended to convey. A simple growth rate simply divides the difference between the ending and starting value by the beginning value, or (EV-BV)/BV. The economic growth rate for a country’s GDP can thus be computed as:
Economic Growth = GDP 2 − GDP 1 GDP 1 where: GDP = Gross domestic product of nation begin{aligned} &text{Economic Growth} = frac { text{GDP}_2 – text{GDP}_1 }{ text{GDP}_1 } \ &textbf{where:} \ &text{GDP} = text{Gross domestic product of nation} \ end{aligned} Economic Growth=GDP1GDP2−GDP1where:GDP=Gross domestic product of nation
This approach, however, may be overly simplistic.
How to Calculate Growth Rate
How to calculate company growth rate?
Revenue growth rate = (Current period revenue – Previous period revenue) / Previous period revenue x 100% You can apply the company growth rate formula to any metric of your choosing. You need to have the current and previous values for the period in question. Substitute the figures in the formula, calculate, and you have your company growth rate.
How do I calculate revenue growth rate?
To complete this calculation, you need the current revenue amount for a set period and the previous revenue amount for a similar period. For example, if you want to determine total revenue growth from Q3 last year versus Q3 this year, you need the revenue amounts for these respective quarters. The company growth rate formula is:
What is growth rate formula?
The growth rate formula is used to calculate the annual growth of the company for a particular period and according to which value at the beginning is subtracted from the value at the end and the resultant is then divided by the value at the beginning. This formula is applied to multiple metric such as GDP, turnover, and so on.
How do you calculate growth rate across two periods?
The formula to calculate the growth rate across two periods is equal to the ending value divided by the beginning value, subtracted by one. Growth Rate (%) = (Ending Value ÷ Beginning Value) – 1 For example, if a company’s revenue was $100 million in 2023 and grew to $120 million in 2024, its year-over-year (YoY) growth rate is 20%.
