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 it 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 base. 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.
How Much Should a Small Business Grow Each Year?
Most small businesses should grow between 10% and 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.
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.
Industry
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.
Economic Situation
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.
Business Age
Older businesses tend to have more market share than their smaller counterparts. While more market share can create stability, businesses are harder to grow as they age. 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.
Business Size
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. Adding $50,000 to a company’s top-line results is easier than adding $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 undertake 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 hiring new workers and investing in new opportunities easier.
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.
Common Challenges of Growing a Small Business
Growing a small business can be a lengthy process. But it can also be riddled with challenges. Again, it’s impossible to include all of them here, but some prevalent challenges include the following:
Lack of Funding
Limited resources can limit a company’s growth and expansion opportunities. Missing out on great opportunities due to a lack of funding can prevent a company from gaining market share.
Oversaturated Industries
Operating in a crowded sector makes it harder for your company to stand out in a pool of competitors. It’s still possible to win in these industries, but it’s easier to generate organic growth in new markets with many potential customers.
Hiring and Retaining Staff
The wrong team members can make your role as a small business owner extremely difficult. However, you can also end up with a great team of workers who end up leaving for better opportunities. Business owners have to work on retaining top talent and knowing when to fire unproductive workers.
Time Management and Burnout
Growing your company can be an exciting journey. That said, it’s essential to practice self-care to avoid burnout or what’s often referred to as entrepreneurial exhaustion. Otherwise, two steps forward could result in ten steps backward if you stretch yourself and your team too thin.
Finding Customers
Establishing a customer base in your target market takes a considerable amount of time. You may have to run ads, send cold emails, tell your friends about your business, and find customers through other strategies.
Marketing and Brand Presence
Building a brand presence can make your company the go-to choice in your area or industry. However, it takes a good business plan and many years of consistently delivering positive customer experiences to reach this milestone.
Unrealistic Expectations
Starting a business with inflated expectations can lead to frustrations that could hinder growth in the short term or until you come up with a viable plan.
The Top Strategies for Small Business Growth
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. These are some of the top strategies to consider.
Hiring and Investing in the Right People
When you’re just starting out, it’s not unusual to want to keep costs low. After all, you need to start bringing in sales, covering operating expenses and turning a profit to stay afloat before trying to expand. And you may choose to operate as a one-person show for some time. However, you’ll need to start thinking about building a team if you want to grow your small business.
It’s practically impossible to scale without having the right people on staff to help bring the visions you have for your company to life. Before embarking on a hiring spree, though, take some time to draft up an organizational chart and outline the role each employee will play in your company.
What are their job duties and responsibilities? Will they manage others? What are the benchmarks they’ll need to meet? How much will they be compensated? These are just a few questions to ponder. Feel free to add to the list as you see fit.
Once you’ve established who you’ll need on the team and have the funding you need to cover payroll, the next step is the hiring process. Again, you have the option to hire full-time employees, part-time employees or independent contractors. The latter could be ideal if funds are tight and you’d prefer to steer clear of long-term hiring commitments should financial difficulties unexpectedly arise.
Either way, your new team should be hardworking and committed to helping your company soar to new heights. However, be careful to avoid “yes men” or team members who are afraid to think outside of the box.
Making a Plan (and a Backup Plan)
You have a vision for your small business, but you don’t know how you’re going to get there. Hence, it is essential to have a plan (and a backup plan, just in case). Or maybe you already have a plan in place but haven’t yet ironed out all the details.
Either way, now’s the time to return to the drawing board and map out business goals. You should also note the steps it’ll take to meet each of your objectives and create milestones to track progress. Be sure to include the talent and resources you’ll need at each stage as well.
A backup plan is equally essential. Sometimes, life happens, and things don’t always go as planned. But you’ll have a plan b to fall back on, so you won’t necessarily lose momentum when trying to grow your business. Instead, you’ll simply take an alternate route.
Researching Your Competition
Researching your competitors to see what they’re doing right in their business can help you grow yours. First, pay attention to how they address the pain points of individuals or entities in your target market. Then, compare it to your approach to identify ways you can provide an exceptional experience that rivals or exceeds that of your competitors.
The idea is to not completely overhaul how you do business. Instead, focus on what you do right, optimize these processes, and eliminate what’s not working. And if there’s a void your competitors aren’t filling, take advantage of the opportunity to address it and grow your company.
Optimizing Your Brand and Leveraging Technology
Brand awareness is a vital component to growing your business in practically every industry. It helps bring the visibility needed to attract new customers, earn their business and retain them as long-term patrons or clients.
Optimizing your brand also helps build credibility and trust, which can improve customer loyalty. You’ll also stand out from the sea of competitors because consumers will know why you are the better choice. It could also be easier to expand into new markets since you’ve already established credibility in the markets you currently serve.
Technology can also help you with this goal. Small business tools make it easier to show up on social media, create graphics for your business, and tap into other growth opportunities.
Strengthening Your Strengths
What does your company do well? This is such a vague question that it could produce a load of responses. So, consider creating a SWOT analysis to lend a helping hand.
Grab a notebook or open a spreadsheet and create a chart with four columns – strengths (S), weaknesses (W), opportunities (O) and threats (T). Start by filling out the first column to get the much-needed answers to these questions, and brainstorm ways you can improve the items listed in this category.
You can also take it a step further by populating the other three columns in one sitting if time permits. Doing so provides insight into opportunities you’re leaving on the table and should try to capitalize on sooner rather than later. You’ll also know what weaknesses you need to focus on eliminating, along with threats that should be minimized promptly to protect your company.
Reducing Your Risks (and Taking Calculated Ones)
As the old adage goes, “The greater the risk, the greater the reward.” Yet, the thought of taking risks in your business could make you cringe, especially if there are cash flow issues or limited reserves. But in order for you to grow your business, it’s vital to take calculated risks.
There are no guarantees you won’t encounter difficulties or short-term failures along the way. Still, you must keep going until you find the path that works for you.
A calculated risk could be in the form of hiring more employees, renting office space, expanding your line of services or products or purchasing a warehouse to increase production levels. That said, you want to carefully evaluate the benefits and drawbacks of the moves you’re considering and identify ways to maximize your chances of success.
It’s also important to invest in the right form of business insurance to help minimize liability. Plus, you’ll have peace of mind knowing you’re protected as you take some of these calculated risks.
Identifying New Opportunities and Capitalize on Them
Constant growth isn’t a surefire result of working hard in your business. Still, that doesn’t mean you should give up on searching for better opportunities. You should actually do the opposite to give yourself the best shot at success as a small business owner.
Even in times when business is slow or somewhat stagnant, continue brainstorming. It can be challenging when the fear of shutting your doors or scaling back tremendously is present. But remember why you started and understand that continuously pursuing your business goals in spite of downturns could yield new opportunities. And when they do arise, you want to be prepared to capitalize on them.
Creating Strong Connections and Partnerships
You can forge strong connections and partnerships by participating in networking events. These gatherings are opportunities to meet other like-minded entrepreneurs doing great things in their companies. Consider volunteering to serve on a panel or hosting a breakout session. You’ll bring added visibility to your company and possibly attract more customers.
There’s also a chance a future collaborator could be present that could help expand your company. As mentioned earlier, multiple individuals or entities working toward the same mission can foster rapid expansion. And by forming strategic partnerships, you may find yourself one step closer to building the business of your dreams.
Adapting and Thinking Ahead
The old way of doing things in your business could still work for you. But at some point, you’ll need to adapt to keep your company from going under. Hence, innovation is essential to keep current with industry trends and continue to meet and exceed the needs of your customers. Adapting to the times could also attract prospects in your client market and make it easy to convert them to loyal customers.
You should also be thinking ahead of time about what could be next for your business. Market conditions change daily, and adapting is crucial for continued success and the growth you’re seeking. Ask yourself the following questions: “What can be done to improve the way you do business?” “How can you better serve your customers?” What can your company do better than the competition?”
Improving the Customer Experience
You can get customers to your business the first time with good marketing, but a good customer experience will keep them coming back for more. Offering new products and investing in customer support can lead to higher engagement and loyal customers.
Being Smart About Accessing Capital
For most small business owners, funding is the difference between capitalizing on growth opportunities or sitting on the sidelines. But, if you’ve always done the latter, it’s time to consider positioning your company to qualify for business financing.
Loans can be a scary thing for small business owners, though. It means one more item has been added to the list of expenses to manage. But instead of viewing business funding as a burden, look at it as an opportunity to propel your company forward.
Consider speaking with business lenders to learn more about the different types of financing your company could be eligible for. The U.S. Small Business Administration’s (SBA) website is another great resource for exploring commercial funding options.
But before you access capital, assess your company’s financial health to determine how much of a business loan you can afford. Also, consult with the lender to get loan quotes. That way, you’ll know exactly what to expect and can make adjustments to your desired funding amount before applying.
