By Mitch Owens, blog writer at TOP CFOS
Of all the ways to gauge a business’s success, growth rate is perhaps the most useful. It not only validates a firm’s value proposition, but it also spells out opportunity. Increased cash from operations and investor interests enable growing businesses to maintain a competitive advantage while expanding their horizons. Everybody loves growth. However, too much growth can hurt businesses. By paying close attention to your financials, though segment and ration analysis, you will know how right rate to grow.
Segment analysis is immensely helpful to understanding how, when, and where to grow your firm. According to Investopedia it requires “conducting ratio analysis on any operating segment that accounts for more than 10% of a company’s revenues or total assets.”1 As your company grows conducting regular segment analysis will provide you with insights into how each business segment affects overall financial growth and performance.
Ratio analysis helps you see the current state and future performance of your business.2 It is the foundation of understanding how your firm will react to future conditions, including growth.
One example of gauging growth is its relation to debt, as there is often a strong correlation between the two. This correlation means that increasing debt can enable a firm to increase their inventory, their R&D, their advertising, and so forth. The increased funds in these areas often lead to significant growth. However, if the debt to equity ratio is too high then the firm may be taking on too much risk. This could mean that the company is growing too fast for their own benefit.
The cases behind growing too fast are rampant. While a student, I became friends with the owner of a small appliance company. He purchased the company from its multi-generational owners who never did anything to grow it. After my friend purchased the store, he took on huge amounts of debt which lead to high levels of growth. Everyone was amazed at how such a small company could become so large in such a short time frame. However, several years after purchasing the store, the economy turned and he lost everything.
The snapshot of ratio and segment analysis shown here is just a small part of massive financial mechanism required to make your firm grow in the long run. As we all know, business growth is complicated. It is more than creating the best product out there and even more than marketing and selling the best product out there. It includes all these things built on a solid financial foundation. That’s why TOP CFOS is adamant about partnering with you. We want to put your company on a track of sustainable growth. Click here to reach out to us today and learn how we cater our approach to help you succeed.