Are you an established business leader? Or perhaps you're studying an EdD in Organizational Leadership. As a leader, it's your job to inspire your teams, lead by example, and drive the growth of the business through rain, hail, and shine. It is also your job to ensure sustainable growth for the business. But what exactly does that mean? This article will discuss sustainable growth and the role leaders play in encouraging it. We'll learn what it is and the role that you can play in ensuring that it is achieved. So, continue reading to learn more about this valuable topic.
What is Sustainable Growth?
Sustainable growth in business refers to "the realistically attainable growth that a company could maintain without running into problems." If you think about the classic Aesop fable, fable "The Tortoise and the Hare", the moral of the story famously goes: "Slow and steady wins the race." This alludes to the core idea around sustainable growth - that consistent and steady productivity and commitment over a longer period of time are ultimately more fruitful in the long term than hastily rushing processes. The challenge modern companies face is knowing how to determine a precise pace and then keeping consistent with it while remaining competitive in their respective markets where they operate.
What is a Sustainable Growth Rate?
This is a simple formula business leaders can use to determine if their company's growth rate is sustainable. It is a relatively straightforward formula for calculating a company's Sustainable Growth Rate (SGR). The formula is basically the Return on Equity (ROE) x (1 – Dividend Payout Ratio). But to understand this formula, you need to first understand the terms within it.
Return on Equity (ROE) is used to assess a particular company's profitability. It can be calculated by examining the company's net income compared to its shareholders' equity dividend payouts. The dividend payout ratio is merely the percentage of earnings per share that is distributed to shareholders as dividends when they are paid out, sometimes quarterly.
The methods for calculating sustainable growth do make some baseline assumptions about businesses and their goals and desires. These assumptions are that the business wants to maintain a set target capital structure without issuing any new equity and that it wants to maintain a target dividend payment ratio and increase sales or revenue as rapidly as the relative market conditions allow. The focal point of this whole system is on equity since financial research consistently indicates most corporations are hesitant to issue new equity.
Why are we sharing this? We mention SGR because having a firm understanding of a company's SGR will offer some helpful insight into your organization's daily operations and the efficacy of management, which you need to be across. You can consider factors such as: Are the company's debts being paid off quickly? Is the business cash flow running as efficiently and smoothly as possible? Business leaders with a measured understanding of sustainable growth can also set consistent sales growth objectives, which they can filter down to their teams.
When a company is operating above its SGRs, business leaders must ensure their focus is on generating sales for the company, and on developing high-margin products to generate revenue. Equipped with the knowledge of your company's SGR, these kinds of plans can be made for temporary periods of time. Without them, a company can face unforeseen issues and financial strains or stray into the area of unsustainable growth. One key area where problems can arise is inventory management. A company without a baseline understanding of its SGR may not sufficiently grasp what inventory is necessary to maintain sales and satisfy customer and stakeholder needs. A shortage of key stock could result in a drop in sales, delays, and ultimately, a negative impact on the company's growth.
How Do Leaders Contribute to Business Growth?
One thing business leaders can do to contribute to business growth is figure out ways to diversify their customer base. This is because diversifying your customer base is a basic aspect of sustainable growth. Relying too much on a single customer segment, no matter how popular it seems or how profitable it has been in the past, creates a crucial vulnerability to volatile market shifts and economic fluctuations.
Business leaders should always be proactively seeking out new demographics to sell products or services to, as well as exploring untapped geographic markets or even adapting the company's products to suit adjacent markets or industries. This will significantly strengthen your business's resilience. It's worth mentioning that taking this approach doesn't mean you have to drop your existing customer base. Instead, consider it an opportunity to connect with other audiences and offer them the same top-notch product or service that solves a problem and that helped you win over your first customers.
Another thing that business leaders can do to ensure sustainable growth within their companies is to diversify revenue streams so they're not reliant on a single source of income. This can mean exploring different and novel ways to generate money for the company, such as launching new product lines to get a foothold in various market segments. Or you might offer subscription services for a consistent, recurring stream of revenue if you sell services, such as software as a service. Or, you might consider forming strategic partnerships with other companies that can open up new opportunities and expand your customer base.
By spreading out where your company's income originates from, you can reduce risk and build a more resilient business that can easily adapt to market changes, and this will ensure steady, long-term growth that is sustainable.
How Can Leaders Keep Growth on a Sustainable Path?
There are a few things you can do as a business leader to keep your company's growth on a slow, steady, and sustainable path.
One thing you can do is invest time in getting to know the staff and teams that you manage. While this may seem like a given for leaders, most business leaders don't truly understand their team's motivations on the deeper level required for true leadership.
As each person on each team is unique, positively influencing their morale requires an understanding of their motivations, feelings, and drive. Ensure that you spend some time at the coalface, asking questions and listening to your staff's feedback. Remember that the success of the company is crucially down to the performance of its staff.
You can also encourage enjoyment at work, making work a fun place to be. Staff perks, benefits, and team-building activities can all contribute to a healthy workplace culture, raise morale, and keep your people engaged. For example, you might start a board game club at work for lunch breaks or offer paid gym memberships or other perks that will keep your staff happy, engaged, and productive.
The Road to Sustainable Growth
This helpful article has shared all about sustainable growth for companies and how business leaders can drive it. By now, you have a firm understanding of sustainable growth, you've learned about SGR, and you, as a business leader, can contribute to this.
