Every company needs to reach more customers and increase revenue to retain market share and stay in business. If growth and customer bases become negative and decelerate, a small business can get lost in the competition. It’s important for companies to improve each year on top-line and bottom-line growth, but how much improvement is necessary?
Ideally, a company doubles or triples its market share and profits, but few companies can maintain those numbers, especially over several years. Growth rates also depend on economic conditions. It’s easier to accomplish objectives during a roaring economy than during a recession. While businesses have varying amounts of success, what growth rate makes sense for your business? Setting a reasonable target can create a healthy challenge that is realistic but difficult.
Annual Average Small Business Growth Rate in the U.S.
According to the Harvard Business Review, the average annual business grows its revenue by 10% to 25% each year. Smaller companies are in a better position to exceed that range since they have smaller customer bases and more opportunities to explore. However, the average growth rate varies for each sector, and with a 2.2% increase in small businesses in 2022, many industries will experience more competition.
Why Is Business Growth Important?
Business growth brings in more revenue for a company. The extra revenue helps a small business owner make more investments and hire more team members. Business growth stimulates the economy and ensures a business sticks around. Companies that eventually go out of business have multiple years of declining revenue and earnings numbers. Any decline makes a company’s remaining market share more vulnerable and can force them to make uncomfortable cuts with its staff and other investments.
Business growth provides stability and sets the foundation for future growth. It’s also a useful counter to risks, such as a recession or a competitor attracting some of your customer bases. It’s similar to having a stuffed emergency fund. You may never use those funds, but they come in handy in case of an emergency. If your business experiences a temporary slowdown, preceding years of growth make it easier to weather the storm.
How Do You Calculate Your Small Business Growth Rate?
The calculation for your small business growth rate is straightforward. First, a small business owner needs to compile revenue numbers from back-to-back years to determine their growth rate. For example, suppose a business owner made $200,000 in 2021 and $250,000 in 2022. The next step is to calculate the difference between these numbers:
- $250,000 – $200,000 = $50,000 growth between 2021 and 2022.
With this number, it’s possible to perform the last step of the calculation. Finally, the business owner must divide the difference by the performance from 2021 (i.e., the year further back).
- $50,000 / $200,000 = 25% annual growth
A $50,000 revenue increase represents a 25% annual growth from 2021 ($200k) to 2022 ($250k). However, if the company reported $300,000 in 2021 and $200,000 in 2022, it would represent a 33% drop instead of growth. The calculation is below.
- 2021: $300k
- 2022: $200k
- $200k – $300k = -$100k
- -$100k / $300k = -33% ‘growth’
You can also compare quarterly growth rates to understand growth rates during slower and busier times of the year.
What Factors Affect Business Growth?
A business owner can control their actions and make decisions that promote growth. However, some factors that impact growth rates are out of your control. Knowing these components can help business owners adapt to challenges and adjust their objectives.
Some industries experience stronger growth than others. Social networks enjoyed significant growth in the early 2000s and 2010s that restaurant owners could only dream of. Some business industries have larger addressable markets. While social networks and e-commerce companies can reach people worldwide, most restaurants are limited to local audiences.
The economy impacts how consumers spend their money, and every business needs consumers to grow and survive. An economic boom and low inflation will make consumers feel more eager to buy goods and services. However, a recession will discourage consumer spending due to layoffs. As more people lose their jobs, they have to be more careful about how they spend their money. Hearing about layoffs or squaring off against inflation will entice employed individuals to stash more of their money for a rainy day.
Older businesses tend to have more market share than their smaller counterparts. While more market share can create stability, it’s also harder for businesses to grow as they get older. Each year of 20% growth makes it more difficult the following year. An older business can benefit from getting easier access to loans since some lenders look for at least two years of experience.
You can only serve a limited number of customers. Even big tech companies that can sell their services to anyone in the world have struggled to maintain rapid growth. Apple, Facebook, Amazon, Google, and Netflix all experienced declining year-over-year earnings in Q4 2022. It is more difficult for these companies to experience high growth rates when most of the world already knows about them.
A smaller company does not have those setbacks. Since fewer people know about small companies, it is easier for those companies to achieve above-average growth. A company can achieve a 50% growth rate by turning $100,000 in annual revenue into $150,000 the following year. However, a company that made $100 billion last year would have to generate an extra $50 billion the following year to uphold a 50% growth rate. It’s easier to add $50,000 to a company’s top-line results than $50 billion.
Revenue, Sales, and Cash Flow
Many business owners use at least one of these metrics to measure growth, if not all three of them. Your company’s financial sustainability influences the owner’s ability to pursue new opportunities and make investments. Increasing revenue, sales, and cash flow each year will help any company. Keeping cash flow in mind helps companies embrace sustainable growth instead of a “growth at all costs” model.
Access to Capital
Small businesses can set growth rates, but the owners need enough resources to take on new projects. Revenue can only take you so far, especially as you disperse it across several expenses. Lenders help companies fill in the gaps and provide access to capital. Borrowing thousands of dollars from a bank makes it easier to hire new workers and invest in new opportunities.
Cheap and readily accessible capital aids businesses with their objectives. A low-interest rate strengthens cash flow, and generous requirements make loans more accessible to business owners. However, lenders will get more selective during economic hardships. They don’t want to risk the borrower defaulting and giving them a less valuable asset. Therefore, instead of taking on new risks in an uncertain economy, lenders may hold off on giving loans or only accept borrowers with the best credit scores.
Without access to loans, business owners may have to pause their growth efforts. For example, it’s difficult to buy a commercial property without a commercial loan. In addition, business owners without net working capital may struggle to keep up with demand during busy seasons and forgo considerable revenue. Small business owners can get creative with initiatives like allowing consumers to schedule reservations well in advance to raise funds. However, it’s more convenient to get a loan from a bank, credit union, or online lender.
How Much Should a Small Business Grow Each Year?
Most small businesses should grow between 10% to 25% each year, but the optimal growth rate depends on the industry, company size, economy, and other conditions. Business owners should strive for high growth rates but only pursue sustainable initiatives. If a growth initiative increases revenue by $100,000 but increases expenses by $120,000, that project is unsustainable. Business owners should review previous revenue, sales, and cash flow to determine appropriate growth rates. It is also a good idea to consider inflation. 5% growth may seem like growth, but if inflation is 8%, the small business would have experienced decreasing purchasing power year-over-year.
How to Grow Your Small Business
It’s one thing to set a goal for your business and something else to see that goal come true. Applying business growth strategies can turn that 10%-25% objective into a reality. Business owners can impact growth by investing their time and money into the right areas. A social media marketing strategy, new equipment, and additional staff represent some investments that can push revenue past the benchmark.
Most growth efforts require capital. Many business owners operate in industries that involve spending money to make money. If you need more capital, a small business loan can provide quick relief. Instead of waiting a few years to save up for a big investment, you can get the necessary funds right away from a bank, credit union, or online lender. You can choose from business-term loans, which have monthly payments, lines of credit that are a bit more generous in the short run, and other financial products.
A loan isn’t the answer for everyone, as some business owners can use their own cash flow or use their time differently. However, it’s a good idea to keep small business loans in mind since they are readily available and can provide a quick boost in capital.