Business growth usually indicates the growth in retained profits in the business. It means owner retains the profits earned after whatever he has withdrawn for his personal use.

Mother of all the ratios is RoI i.e. return on investment or equity, that is given by –

RoI = Profit / Equity or Owner’s Funds, which is combination of –

1. 1. Profit / Sales
   2. Sales / Assets
   3. Assets / Equity

Now when we break up RoI as above, we get the formula for business growth. Now let’s understand what it exactly means –

1. 1. Profit / Sales

It mathematically indicates how much profits are generated out of sales. It means typically it talks about the profit margin included in the sales. Now, generally, profit % margin is inversely proportional to the sales volume. It means more the % profit margin lesser would be the quantitative sales and vice a versa. Therefore, if in our kitty we hold products or services that are single dimensional then obviously the business becomes risky due to its situation dependency. However, if our products or services are multi dimensional then risk is balanced since revenue and profits keep coming in varied situations.

2. 2. Sales / Assets

The second most important aspect is how much revenue is generated by the assets that we have invested in. Simply, it calculates the ability of revenue generation of our assets. In short, it tests the competence of financial management of the top management as it takes decisions to acquire and rotate the assets available with the business. The combination of liquid assets and long term assets decides the ability to generate the revenue. It also indicates the existence of non-revenue generating assets and availability of assets on scaling up of the revenue. This is a critical decision in the business that can drive growth of sales and affects the profit margins as well.

3. 3. Assets / Equity

It talks about financing of assets. The sources of financing are as under –

1. 1. Own Funds
   2. Borrowed Long Term Funds
   3. Borrowed Short Term Funds

The capital structure decides the long term sustainability of the business. Every source of funds has a cost and repayment period. The capital structure formation depends upon the development stage of business, funds availability with the owner, type of business or industry, profit margins available in the business, combination of capital assets as well as working capital quantum required etc. Therefore, if sme owner gets his capital structure right then probably there is lesser pressure on the profitability as well as liquidity due to capital structure.

Did you know that above factors i.e. Profitability, Liquidity and Solvency, can make or break the business growth fundamentally? If not and still we are doing good business because probably we are doing most things right unknowingly as stated above or it clearly testifies the existence of GOD. However, if you wish to do things right consciously and don’t leave to the act of GOD then you must start the journey of “UNDERSTANDING BUSINESS WITH NUMBERS”. Whom are you waiting for? Log on to happybalancesheet.com or download the app – hbs and learn 7 Secrets of Happy Balance Sheet.