By Fernando Berrocal

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A business startup should aim for a growth rate that is both sustainable and scalable in a short to medium amount of time. Depending on the type of business, this can change, but generally speaking, a brand-new startup should grow at a rate of 20% to 30% annually.

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For instance, certain businesses in the technology sector have been known to grow at rates of 50% to 100% in one year alone. This, however, is not always viable and can result in major issues. The takeaway? Finding a balance between expansion and profitability is crucial. Forecasting revenue can be challenging; if it's too high, investors might not trust it, otherwise, the other party might lose interest. Usually, a startup can´t become economically viable for some years. What views does the creator have regarding this roadmap? When can we anticipate the company's revenues to start increasing? Due to a lack of information, founders frequently aren't aware of how much money their startups will make. Businesses that provide forecasts have an inherent motive to provide accurate and fair estimates.

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Why Should Founders Be Concerned With Growth Rate? 

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The gross margin of a business is a crucial indicator of its potential sustainability and profitability. It also serves as a gauge for revenue growth. This percentage represents the firm's growth rate and potential. Whether the growth rate is expressed on a monthly or annual basis depends on the industry, its stage of development, and its predicted growth rate. If data is available or investors are interested in knowing the future possibilities for a startup, this can be estimated at any stage of the firm's development.

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Figuring Out Your Growth Rate

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The rate of growth can be impacted by a variety of variables such as the sector, present skills, and firm age. There are other methods for determining revenue growth rate, however, this straightforward formula is one of them:

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($) Revenue Month A * 100 ($) Revenue Month A = (%) Revenue Growth Rate

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Other Considerations

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Professionals advise starting with the costs before examining important metrics like the operating profit margin. Other recommendations include tripling the estimated expenditures for legal or insurance services and doubling the estimated costs for advertising. These categories could differ between suppliers and come with unstated charges. Tracking customer service time is crucial for calculating labor costs. A suggestion to compute both a conservative and aggressive growth rate will be welcomed by investors. Retention rates, marketing tactics, and the stage of a company's expansion are possible additional influences. These variables could all be present in any given combination and affect the growth rate.

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How To Take Advantage of Growth Rate

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A business can benefit from its growth rate in the following ways:

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• It's critical to comprehend the criteria lenders and investors use to assess the startup's current and future growth to successfully obtain funding.

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• Calculating the growth rate on a monthly (or longer) basis is crucial to creating operational and staffing plans that will best support future expansion. This makes it possible for minor adjustments to price, staffing, or other day-to-day details to have a significant impact on results.

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The growth rate indicator is used by investors to forecast growth and estimate the potential Return On Investment (ROI). Startups must demonstrate to investors both short- and long-term growth rates since they may not immediately create enough income to significantly impact their financials. However, the company can forecast expansion during that period and the start of a return on investment in two or more years.

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What Growth Rate is Ideal for a Startup? 

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Different industries experience different rates of growth. Startup businesses and business expansion are more appealing to some industries than others. Companies should use a benchmark of 15% to 45% annual average growth. According to Software as a Service (SaaS) research, businesses with annual revenues under $2 million experienced faster growth.

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Tips for Controlling Your Growth Rate

These are crucial indicators of a company's potential long-term growth. Growth rates should be given priority for businesses to make wise judgments about their future. Planning for future resource use and luring investors interested in potential companies is crucial. Your revenue can be increased via a variety of growth tactics. Since some industries will have faster growth than others, it's critical to regularly watch this indicator. You can make use of tools like the revenue dashboard and forecaster. With the use of Baremetrics, you can measure Client Retention, Lifetime Value (LTV), and other crucial business metrics.

How To Determine a Reasonable Growth Rate

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You´ll need specific information and financial criteria to calculate a firm's growth. It is crucial to understand these before starting the calculation. It's critical to take into account all variables that can affect the organization's future success when making projections. These procedures will assist in calculating a business's realistic growth rate.

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1. Collaboration With a Financial Analyst: Financial analysts are adept in analyzing financial information and offering precise forecasts of a firm's growth rates. If you need assistance comprehending the financials of your business, a financial analyst can offer professional insights and analysis. On growth rates, many financial analysts may have varying perspectives. Some might be pessimistic, while others might be overly cautious. You can solicit advice from several analysts to aid in your search, your firm will be able to grow as a result.

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2. Use Several Growth Rate Proxies: You can track multiple financial parameters in addition to revenue to calculate the growth rate. Useful indicators include:

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• Return On Equity (ROE).  A percentage of the money invested is returned to investors. For shareholders to evaluate how well a firm is performing is a crucial statistic. It not only reveals how much profit the business has made, but also whether it can pay dividends and reinvest the money for expansion. Investors can gain a better understanding of how a firm's expansion plans are developing by analyzing ROE over time.

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• Earnings Per Share (EPS).  Common stock firms can use earnings per share to accelerate their growth. To calculate EPS, divide the total profit by the number of shares. The ratio of income to stock shares can be used to estimate a company's potential profit. Which financial metrics differ from one another in terms of percentage? To determine how your business is expanding, compare the growth rates of various financial variables.

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3. Consider debt.  Remember to take into account both current and upcoming loans when determining your growth rate. This covers any debt you have currently to finance your business as well as any debt you might incur in the future to achieve your targeted growth objectives. This will enable you to have a reasonable expectation of how much money a lender will ultimately provide you.

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4. Calculate the costs.  Businesses frequently experience unforeseen expenses. Planning for spending can be challenging for firms when external circumstances are uncertain. It's crucial to overestimate your anticipated costs to ensure that you account for all potential outcomes. This will enable you to plan for any unforeseen expenses and guarantee the ongoing profitability of your business. Business planners and financial analysts frequently double or triple the amount they anticipate spending when estimating the cost of categories with more unknowable variables.

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5. Determine the highest growth rate that can be sustained.  You must first calculate the ROE and then adjust it to account for dividend payouts to assess sustainable growth. The ROE is a metric used to assess how effectively a business makes a profit from its shareholders' equity. Divide the ROE by 1 less the retention ratio to get the sustainable growth rate. Given the resources at your disposal, this information can assist you in establishing reasonable growth goals for your company.

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6. Watch for patterns over time. To determine a firm's growth rate, multiple measurements are essential. As the growth rate changes over time, keep an eye out for patterns and trends. You can anticipate a 5% increase the following year if the growth rate was 20% three years ago, 10% the year before that, and 5% this past year. The more information you have, the more accurate your future projections will be.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.