What is the mathmatical formula for calculating the fundable growth rate in businesses?
Answer:
Check out "Fundable Growth Rate" (near the bottom) at
http://www.vanilla-accounting.com/blog/a.
Income minus Operational Cost=Net Profit
KISS method
Hopefully this will help you. As you can see this rate is dependant on several variables:
Fundable Growth Rate
In addition, there is one critical measure that offers companies a tremendously valuable tool for managing their cash flow and defining their overall financial strategy. It is called the Fundable Growth Rate (or FGR for short). This is a single number that tells you how much you can grow your business right now (i.e. without seeking additional cash). The number is different for each company, of course, and depends upon several variables. For example, a company with $1 million revenue that has a 20% profit margin (after tax) and $150K in working capital might have an FGR of 35%. That means that the company can safely grow sales to $1.35 million without requiring additional funds from shareholders or outside sources. If it grows at a slower rate, then it will generate positive cash flow. If it grows faster, then the business will use more cash than it is generating (i.e. negative cash flow) and will require additional funding.
Once you know this number, which basically represents the optimum rate of growth for any business, then you can start to answer some very interesting questions. For example, how much additional sales would be needed to increase your profit goal from $200K to, say, $350K? Are there other things that could be done to achieve that goal- for example, ways to increase gross margin and/or reduce our operating expenses? What would happen if you tried to increase sales by offering price discounts or extended payment terms? (Hint: both profitability and cash flow will be impacted, and both need to be considered during planning.)
The beauty of the FGR is that it summarizes the relationships between all the elements that drive cash flow and profit (pricing, sales volume, credit terms, etc.) and makes it possible to focus on one number. This is the essence of great accounting: translating complex financial information into a relatively simple measure that can be used to help you make better decisions.
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