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Arithmetic versus Geometric business growth 3 November, 2006

Posted by varoom in Business Plans.

This is a way to review the type of business that you want to build and what it means to the way that your business will grow and what kind of investment will be needed.

An arithmetic business is a company where one unit of investment makes exactly one unit of growth. For example, you have a delivery service; you deliver packages in a local area. There is a finite earning capacity for each van you employ to deliver your customers packages. To grow you need to add more vans, each van will add a finite amount of revenue to your business, assuming an unlimited market with no competition. This is an arithmetic business.

The geometric business is one where adding one unit of investment makes more than one unit of growth, maybe ten times or one hundred times the investment value. In the case of this business you will develop a product or technology and sell it over and over again without any more investment. This geometric growth is desirable in a product development and sales enterprise. This kind of growth excites investors as they can see huge potential for profits from a certain investment level.

In some enterprises there is a mix of both kinds of business. For example you have a company who designs products and sells them in a market (geometric) but they also sell their engineering expertise in the form of consultancy to their end customers (arithmetic). In fact due to the likely shortage of experts in the field it could fail to be even arithmetic if expansion is limited by scarcity of resources.

When it comes to a conflict which should be the preferred use of the resources Product design or Consultancy? Looks like an easy decision but these choices are often distorted by the current financial position of the company. If cash is short consultancy can help in the short term at the cost of future product development.

Getting correct investment funding in order to develop the right product to get the geometric growth is crucial. Having a clear vision of the type of business you are building also makes short term decisions easier.


Greville Commins



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