An internal growth rate, or IGR, is defined as the highest level of growth a business can reach without using outside financing. A maximum IGR describes a company’s level of business operations able to fund and grow the firm.
This measurement is crucial especially for startup companies and small businesses. The reason being, IGR shows a company’s ability to increase sales and grow profit without getting new debts or issuing more stock.
What does IGR tell?
Internal growth rate helps a business realize whether it can use its existing resources more efficiently. It allows a company to analyze the production process. To illustrate it on a real example, the eventual changes in the use of machinery and equipment, the reduction of idle time or the level of inventory carried in the warehouse could change the efficiency of a business and generate internal growth.
Another way of generating it is a company’s decision to add new business lines to complement the products already offered by that firm. This strategy can help companies be less dependent on seasonal changes and other instabilities varied in every business.
Using IGR in business expansion
It is common in business to follow the internal growth strategy that aims at increasing the market share for products the company already offers. In fact, companies take different approaches to have a higher market share.
Firstly, a firm can work on improving its marketing outcomes. This would help the company sell more products while not increasing the expenses. That is why it is so popular among businesses to build brand recognition: it is crucial for marketing results.
Secondly, a company might try to make their relationships with the already existing customer base deeper by offering them new products. This would probably be a point where the IGR will demonstrate the need for outside financing since it most likely would no longer be able to generate cash flows internally.
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