According to Paul Graham, VC and co-founder of Y-combinator, if there is one metric every founder should know, it is the company growth rate. The growth rate is the measure of a company’s increase in revenue and potential to expand over a set period.

Why should you know your company growth rate?

Because it is one of the main metrics for assessing the potential of startup companies and is a measure of the percentage increase in revenue for a company. In other words, a company’s growth rate is an indicator of company profitability and sustainability. This percentage is an indicator of how rapidly a company grows and its projected growth over time.

The growth rate can be given as a weekly, monthly, or annual rate depending upon the company’s industry and stage of growth. It can be calculated at any stage of growth given the correct data by the company or by investors wanting to understand the future of a startup.

How to Calculate the Growth Rate

There are various ways to calculate the growth rate depending upon which industry the company is involved in, the current capabilities of the company, the current funding phase, and the age of the company, among other factors.

While there are a number of options, this simple formula can be used to calculate revenue growth rate on a monthly basis:

**{[(Second Month Revenue)-(First Month Revenue)]/(First Month Revenue)}* 100%**

Other Considerations

There different approaches and several other considerations that can be taken into account when calculating growth rates of a company. For example, experts suggest starting the math with a company’s expenses and checking “key ratios” such as the operating profit margin and the “headcount per client” (i.e., the number of employees per client).

Other rules of thumb include doubling cost estimations for advertising and tripling estimations for legal and insurance costs, as these categories often incur hidden expenses or vary from provider to provider. In addition, you can monitor customer service time to give a starting point for estimating future labor costs as the business grows. It is also suggested that you calculate a conservative growth rate and an aggressive growth rate to provide to investors.

Other considerations that should be taken into account when determining a growth rate include the retention rate, marketing techniques and their efficacy, product seasonality, and the stage of company expansion. Any one of these, or a combination thereof, could affect the growth rate.

It is also important to keep in mind that…

  • Businesses built from the ground up will tend to have greater growth rates, as zero to any amount of revenue is a large increase.
  • Growth rates will vary for different industries.
  • Factors like setup times, adoption speed, sales cycles and market opportunities will also vary based on the stage of growth.

How to leverage the growth rate metric

A company can use its growth rate for the following purposes:

  • To secure funding from investors or lenders, who use the metric to evaluate the startup’s current and potential growth.
  • To develop operational and staffing plans that will best benefit the future of the company. Since the growth rate can be calculated on a weekly, monthly, or longer basis, it is easy to see how small alterations in pricing, staffing, or other day-to-day minutiae can have a very dramatic impact on outcomes.
  • To determine how best to allocate resources. If the business grows too quickly and initial resources are used up without a plan or it grows too slowly and resources are wasted, costing money, then a company can be negatively affected or shut down.

Investors also use the growth rate metric to forecast growth and get an idea of the potential return on investment. So, for startups, it is imperative to show investors both short-term and long-term growth rates.

Why? Because, a new business may not generate revenues that considerably affect its financials in the first year. However, the business may project to see growth during that time and begin to show a return on investment within two or more years.

What is a good growth rate?

Growth rates vary from industry to industry. For example, in industries that are currently billed as the “hottest” for startup companies and expansion, some examples of average growth rates include:

However, as a general benchmark companies should have on average between 15% and 45% of year-over-year growth. According to a SaaS survey, companies with less than $2 million annually tend to have higher growth rates.

Managing your growth rate

Growth rates are the measure of a company’s increase in revenue and potential to expand over a set period. Therefore, your growth rate should be a key focus in your business. After all, you will need it to help plan resource use for the future and to possibly draw in investors looking for startups with potential.

While growth rates vary by industry, there are several growth strategies that can grow your revenues significantly. Tools like the revenue forecaster and revenue dashboard can also help you keep an eye on this vital metric.

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