Planning for Sustainable Growth
Sustainable growth is one of the most important measures of business success and is listed among 37 variables that determine success like market share, market growth, marketing expense to sales ratio or a strong market position. Sustainable growth does not just happen, it must be planned. Technically, a sustainable growth rate (SGR) is the maximum rate of growth that a business can sustain without increasing financial leverage. In other words, SGR measures how fast a firm will grow without external financing. After a firm has passed this rate, its growth will decline in the long term, and it has borrow to facilitate additional growth. SGR is the optimal rate of growth from a financial perspective given a specific financial strategy defined by the businesses financial policy.
Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy like debt to equity ratio, dividend payout ratio, profit margin, assets to net sales. The SGR framework provides a comprehensive financial framework and formula for entity specific SGR calculations. The sustainable growth rate model has important implications for business valuation models like the Gordon model and other discounted cash flow models (DDM) require a growth estimate that can be sustained for many years. The sustainable growth rate can be a check if business plans are reasonable.
Implementing a strategy to increase SGR is very complicated since its the product of the businesses return on equity and the percentage of its profits that is invested back into the firm. A simple SGR calculation is: ROE x (1 – dividend-payout ratio) The SGR formula assumes that a company will maintain a target capital structure of debt and equity,(D/E Ratio) keep a consistent dividend payout ratio, and accelerate sales as quickly as the organization allows.
Strategic planning is critical to the develop of organization specific Sustainable Growth Model. All businesses desire achieving a good SGR but may lack the internal resources to develop SGR Model, or desire an independent objective evaluation. Externally, many factors can prevent a business from growing and achieving an optimal SGR. Consumer trends, the legal environment, global competition, politics, demand and supply, market shifts, new technologies and other factors can help or limit a businesses ability to achieve sustainable growth.
Internally, businesses may make the wrong decision about which projects to invest in, or what operations to increase or eliminate when analyzing profitability. Market Planning is one aspect of strategic decision making that is essential for developing SGR. For example businesses may be tempted to compete for business by slashing prices and potentially decreasing growth. Companies may also invest money into new product development to try to keep existing customers, which can cut into a company’s ability to grow and achieve its SGR. All of the these are strategic decision that require competent analysis and decision making.
Another factor that limits a company’s ability to achieve sustainable growth is its strategic planning capability which is impacted in part by its managerial accounting practices. Many companies confuse growth strategy with growth capability and misidentify the optimal SGR. If this happens, a company will achieve high growth in the short term but it will be unsustainable. Also, when growth exceeds the optimal SGR, growth is greater than what the company can self-fund, and it is important to develop a finance strategy that will increase equity, financial leverage, reduce dividend payouts, increase profit margins, or decrease the asset to sales ratio, or a a combination of these. Any of these factors can increase the SGR to a higher level.
We employ a comprehensive approach to help business develop and implement models for sustainable growth using managerial and financial accounting techniques, finance, capital planning, market planning, business structuring as well as specific project management and operations services to ensure that our clients achieve sustainable growth. Our services include:
Call us for a complimentary analysis of your plan for sustainable growth. We provide a clear written summary of proposed recommendations with full support for implementation of those recommendations through completion of those projects. We also advise clientele business structure including:
- Forum Selection
- Entity Selection
- Initial Financial Structure
- Board Election
- Business Licensing
- Location Selection
- Office Support and staffing
Our range of business services include: FP&A | Funding | Corporate Transactions | Intellectual Property | Contracts | Operations
Our advisory practice is the core of our business. Our legal, finance, operations, and human capital consulting teams have many years of experience handling major projects including M&A, Marketing, Data Analysis, Research, Legal, and Due Diligence at some of the largest corporations in the world. Accordingly, we understand key operations efficiency issues and how to get operations done quickly at a cost that makes business sense and brings great value. We provide extraordinary hands-on advice and service in connection with the following types of matters:
1. General corporate matters: Many of our clients retain us to act as their “outsourced in-house consultant.” This arrangement has three principal benefits: (i) we develop an in-depth familiarity with our client’s business, culture and legal operational needs; (ii) we maintain a long-term relationship, which facilitates efficiency of service with no additional employee headcount; and (iii) we can become an integral part of our client’s management support team.
2. Draft and Negotiate Transactional and Operations Agreements: Founder’s agreements, shareholder’s agreements, operating agreements, partnership agreements and buy/sell agreements, Employment and consulting agreements, IP agreements, including confidentiality and inventions assignment agreements, terms and conditions, and privacy policies, Commercial contracts, including services agreements, partnering agreements, vendor/supplier agreements and OEM agreements, Structuring of equity ownership, including vesting issues, Corporate governance, board of director matters and voting agreements, Equity and non-equity based incentive compensation and option plans, Bank documents and agreements, Buyouts, reorganizations, dissolution, and liquidation.
3. Finance and Capital Planning: Obtaining and managing capital for business growth, development, and sustainability are some of the most important factors in success. A full 80 percent of new businesses fail due to inadequate funding and capital management practices. We use creative finance techniques, sourcing, and managerial accounting strategies to support your businesses finance needs through all stages
4. Private Placement Securities Matters: SEC securities laws are complex and require an experienced legal team to help navigate them. Indeed, non-compliance with applicable securities laws could result in serious adverse consequences, including a right of rescission for the security holders. We have a strong team of experienced finance and securities professionals who assist clients with most securities related matters including:
- Capital planning
- Managerial Accounting
- Investor Services Documentation
- Private placements, SEC and Blue Sky Law Compliance
- Reverse mergers
- Investment Fund formation
- Financial Reporting
Call us for an analysis of whether your sustainable growth model will ensure optimal organizational growth and effectiveness. We ensure your enterprise embraces best strategic practices for effective market leadership and sustainable growth . Call us today for an advisory session. We provide technical implementation for all planning initiatives in compliance with Best Practices.