Exponential Growth

February 16, 2017

Compound growth is growth within an interval, eg 10% growth per year. Exponential growth is the effect of compound growth over an extended period of time, eg 10% per year for five years. Often exponential growth becomes apparent at some “tipping point” where compounding suddenly becomes significant, as this story illustrates:

A wise man invented the game of chess and brought it to his emperor, who offered the man a reward of his choice. The man, said he’d like some rice – one grain of rice on the first square of the chess board, double that on the second square, double that on the third square and so on. Thinking this a modest request, the emperor called for his servants to bring the rice. He quickly found that the rice soon covered the chessboard, then filled the palace. In fact there wasn’t enough rice in the whole kingdom to fulfil the reward. The total number of grains rice on the last square of the chessboard would have been 2^63 – approximately 18,446,744,070,000,000,000 grains of rice!

Let’s apply that story to business and look at the impact of growth rates on company revenue over five years:

$1m company growing Time to reach $1.1m revenue Total revenue reached in 5 years
2% per year 5 years $1.1m
2% per week 10 months $3.2m
2% per month 5 weeks $172m

The Economist Guide to Analysing Companies notes that a company growing at a rate of 15% a year is doubling in size every five years. It defines “rapid growth” companies as those with annual growth of at least 20% a year, and “super growth” at 40% a year.

However, a company growing at just 1% a week for five years will end up more than twice the size of a “super growth” company that grew 40% per year during the same interval, i.e. $13.3m vs. $5.4m.

The take-away is that consistent, small percentage increases, when compounded, will have an exponential impact on your growth rate over time. And this applies to any company, in any sector, located anywhere. It’s not limited to those that are venture funded or located in Silicon Valley.

Most companies get the funds they need for growth by figuring out how to grow revenue, be profitable, then reinvest a substantial portion of those profits back into growing the business.

At the Australian Centre for Business Growth we have a profit improver tool that we make available to companies in our programs.  It simulates what happens when you increase or decrease factors such as cost of goods sold, price, etc. to determine what kind of growth makes sense for your company.

Dr. Jana Matthews

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