Sustainable Growth Rate Calculator

The formula

SGR = Return on Equity × Retention Ratio
SGR = (Net Income / Equity) × ((Net Income − Distributions) / Net Income)

Two factors:

• Return on equity (ROE): how much profit each dollar of equity generates per year
• Retention ratio: the share of profit kept in the business (1 minus the share distributed to owners)

Multiply them. The result is the maximum revenue and asset growth rate the business can fund from internal sources.

Why this matters more than owners realize

The most common growth failure pattern in small business is growing faster than SGR for too long without a financing plan. The pattern looks like this:

1. Revenue is growing — say, 30% per year. Looks great.
2. But profit is only growing 20% (margins compressing as you scale).
3. And working capital — receivables, inventory — is growing alongside revenue, absorbing cash.
4. The owner keeps taking distributions at last year's rate, because that's habit.
5. Cash gets tighter every quarter. Line of credit usage creeps up.
6. 12-18 months in, the business hits a working capital crunch — payroll is hard, payables are stretched, the line of credit is maxed.

The business looks successful from the outside (revenue and customer count climbing), but it's structurally cash-poor. SGR catches this pattern before it bites.

A worked example

A services business with $150K net income on $750K equity. The owner takes $75K in distributions per year. Actual revenue growth has been 22% for the past two years.

• ROE: $150K / $750K = 20%
• Retention ratio: ($150K − $75K) / $150K = 50%
• SGR: 20% × 50% = 10%

Sustainable growth ceiling is 10%. Actual growth is 22%. The gap is 12 percentage points — substantial. The owner is financing the gap somehow: line of credit, term debt, owner contributions, or eroding cash reserves. Without external financing or a change in the equation, this trajectory typically ends in a working capital crunch within 12-24 months.

The fix isn't complicated, but it requires choosing among options:

1. Raise SGR. Reduce distributions (retention 100% lifts SGR to 20%, matching ROE), improve margins (raises ROE), or both.
2. Slow growth deliberately. Growing at SGR or below means no external financing needed. For some owners this is the right call — consolidating profitability before pushing volume.
3. Get a financing plan. If you want to keep growing at 22%, get committed external financing for at least 18 months of expected cash needs. The DSCR calculator validates whether the business can support the debt.

Three levers for raising SGR

1. Improve margins (raises ROE)

Higher net income on the same equity base directly lifts ROE. The Profit Lift Calculator surfaces the highest-leverage margin moves; the EBITDA calculator shows operating profitability in cleaner terms. A 2-percentage-point margin improvement on a 15% ROE business raises SGR by 1.4 points at 70% retention.

2. Improve asset turnover (raises ROE differently)

Higher revenue per dollar of equity lifts ROE without requiring margin improvement. Faster receivables collection, tighter inventory, and selling underutilized assets all contribute. The DSO, Inventory Turnover, and Working Capital calculators surface specific levers.

3. Reduce distributions (raises retention)

The most direct lever, but the hardest emotionally. If you're taking 50% of profits in distributions and growing at 25% per year, the math doesn't work — you're externally financing growth. Reducing distributions to 20-25% during growth phases is a normal pattern; many owners increase distributions only after growth stabilizes.

When growing below SGR is fine — and when it isn't

Growing slower than SGR isn't a problem; it just means the business is generating excess cash. That cash has to go somewhere — additional growth investment, distributions to owners, debt reduction, or accumulating reserves. All legitimate uses, depending on goals.

The exception: if growing far below SGR consistently, the question shifts from financing to opportunity cost. A business generating 20% ROE and growing 5% is leaving substantial value on the table — competitors who grow toward SGR will eventually outcompete on scale.

Common mistakes

1. Treating SGR as a target instead of a ceiling. SGR isn't the right growth rate — it's the maximum growth rate without external financing. Growing slower is fine; growing faster requires financing. Many owners chase SGR as if it were the goal.
2. Including owner salary in distributions. Salary is already an operating expense reflected in net income. Distributions are the cash taken OUT of remaining net income — owner draws, dividends, profit distributions. Counting salary twice produces a hugely understated SGR.
3. Comparing actual asset growth instead of revenue. SGR formally measures the rate at which assets (and revenue in steady state) can grow. Practically, owners think in revenue terms; that's usually fine because they grow together. If asset intensity is changing rapidly, the comparison gets fuzzier.
4. Ignoring working capital absorption. SGR assumes a stable working capital ratio. Fast-growing businesses often see DSO and inventory grow faster than revenue, which absorbs more cash than SGR predicts. Use SGR as the floor of cash needs, not the ceiling — real-world growth often consumes more.
5. Forgetting taxes for pass-through structures. In some tax structures (such as US S-corps and LLCs, or similar pass-through arrangements elsewhere), "net income" is the business's profit but the owner pays taxes on that personally. If distributions are sized to cover personal tax on the income, that's a mandatory distribution — retention can't go below the tax bill. SGR is constrained accordingly.

FAQ

What's a normal SGR for a small business?

For stable, profitable small businesses, SGR typically runs 5-15% per year. Higher than 15% usually requires either exceptional margins, very high retention, or both. Lower than 5% is constraining — limits how fast you can grow without external financing.

Should I include or exclude my salary?

Owner salary is already in net income as an expense — don't add it to distributions. Distributions are the cash taken out of remaining net income (owner draws, dividends, profit distributions). For owners taking both salary and distributions (common in some tax structures), only the distributions count toward retention.

What if my equity is negative?

If accumulated losses or prior distributions have driven equity below zero, SGR can't be computed meaningfully — ROE is mathematically undefined or perversely large. Negative equity itself is often a signal of financing distress and warrants attention before growth-rate questions.

Does SGR work for service businesses?

Yes, with one caveat. Service businesses often have low asset intensity (small equity base), which can produce very high ROE and therefore very high SGR. The math is right, but the practical implication is different — for a service business, the constraint is usually labor capacity rather than capital. SGR tells you the financing capacity is high; whether you can hire and train fast enough is a separate question.

How does SGR relate to DSCR?

SGR tells you how fast you can grow without debt. DSCR tells you how much debt you can take on. Together they frame the financing conversation: if you want to grow above SGR, the delta has to come from somewhere — usually debt — and DSCR tells you whether the business can support that debt.