Do you know how to find the annual growth rate of your business?
Annual growth is a core measurement in determining your business success. It shows how quickly your business grows and when you will meet your revenue objectives based on historical growth. Growth is essential for companies to reach or maintain profitability, especially in the early stages.
The annual growth rate is also an excellent way to determine how you stand compared with your competition. Are you growing faster than them? Catching up? Or are they outpacing you in terms of revenue?
It’s important to note that many companies will use this figure to indicate their overall health and success.
Outsiders may assume that things are going well for the business if growth is strong. But if it’s low, they might question what’s wrong with the firm or whether it has any direction.
How do you think about growth?
What is Annual Growth Rate?
Annual growth rate (AGR) measures the percentage change in a variable, typically revenue, over a year. It’s used to track the growth of an entity and performance. It’s also referred to as the Average Annual Growth Rate (AAGR) or simple growth rate and is an excellent measure for determining your company’s revenue trajectory.
Why Does Annual Growth Rate Matter?
While the annual growth rate is vital for measuring performance over time, it’s also an essential component of any business plan. It helps you decide where to focus your efforts and can aid investment and hiring decisions.
A company growing at 2 percent per year but suddenly seeing a big jump from 5 percent to 8 percent will want to know why. Understanding the change can help the company plan for continued growth and do more of the same.
Measuring your company’s growth also allows you to determine whether your business is performing well overall or if there are specific areas that need improvement.
Why does your business’s annual growth matter?
Annual growth rate accurately measures how much your business is growing vs. the previous year. A growth of 10 percent per year means you’re doing better than most businesses in your industry that are also growing at less than 10 percent.
But if you had expected to grow at 25 percent, you underperformed and now need to determine the root causes and take corrective action.
You can also use this information to compare yourself to other companies in your industry and decide where you should invest your time and money.
Making decisions about the future
Annual growth rate also helps you make decisions about the future. For example, imagine your AGR has decreased significantly and you anticipate no quick turnaround. You might decide to trim underperforming staff or invest more resources into marketing instead of expanding production capacity.
Annual growth rate can also help you decide where to invest for future growth opportunities. If you target 20 percent growth per year, but your current annual growth rate is just 5 percent, maybe it’s time to change something!
How Do You Calculate Annual Growth Rate?
Calculating the annual growth rate is simple. It only requires the ending and beginning values:
Annual Growth Rate = Ending ValueStarting Value – 1
For example, assume your ending value is $1,100 and the starting value is $1,000. Your annual growth rate will be $1,100 divided by $1,000. Subtract 1 from that result and you get 0.1 or 10%.
1.1-1= 0.1 or 10%
Your annual growth rate will be 10% when represented by a percentage.
How are Annual Growth Rate and Compound Annual Growth Rate Different?
Expressed as a percentage (e.g., 15% per year), the compound annual growth rate is the rate at which an investment has grown, taking into account the effect of compounding. The annual growth rate reflects the speed at which an investment has grown over one year.
The difference is that the compound annual growth rate reflects the effect of compounding.
For example, if an investment’s annualized return was 10%, but it grew from $100 to $110 over one year, it would have had an actual CAGR of 8%. Assuming that this investment compounds annually, its CAGR would be 9%.
Want to Maximize Your Annual Growth Rate?
You’re not alone if you have ever wondered what your annual growth rate is or what it should be.
The annual growth rate is one of the essential metrics any business can measure against. It tells you how much revenue your business will make next year and gives you a snapshot of how well your business is performing today.
Knowing how to find your annual growth rate and then leverage it is essential to use data to grow a successful business.
Founder’s startup accounting experts can help you identify the best levers to improve this metric and many others. Contact Founder’s today to start maximizing your annual growth rate.