Question

One of a CFO's most important responsibilities is to help his/her company in managing growth. This week's readings refer to two growth rates, an internal rate and a sustainable rate of growth. What does each rate mean? Why do we, as CFO's, need to understand the implications of both the internal and sustainable rates of growth? What are the four primary determinants of a company's growth and how does each factor add to or limit a company's growth potential?

Answer 1

There are generally two types of growth rate which are followed by various companies and their internal growth rate and sustainable growth rate. internal growth rate is mostly related at maintenance of a growth rate by using of the internal financing and they will never advocating for resorting to the external mode of another thing whereas, sustainable growth is focused upon taking external financing in order to enhance the overallrate of return associated with project so they will not be bothering about taking any kind of external finance if they are able to beat the rate of return.

CFOs need to understand the implication of both the growth rate as they need to identify the nature of the company and their ability of the company in order to repay the external debt and hence if they find out that companies having enough rate of return to pay out with the cost of capital then the company should go for the external financing and they should be using a sustainable growth rate if they are not able to generate a higher rate of return they should be sticking to internal growth rate.

4 different factors affecting the growth of the company are as follows

A. External financing- if the rate of return is higher than cost of capital, then company will be having a higher growth rate

B. Location of business is another important aspect and if there is an advantages location it would be leading to growth

C.business structure and management is another element of growth in which the business structure and the ability of the management to guide the business is analysed

D. personal and behavioral traits of various employees are also important in order to determine the growth of the company in the long run.