What is Compound Monthly Growth Rate?

Running a startup involves keeping track of various metrics to gauge success and growth. One essential metric to consider is the compound monthly growth rate (CMGR). This figure, akin to the compound annual growth rate (CAGR), shows how your company’s metrics are growing over time but on a month-to-month basis. Let's dive into what CMGR is, why it’s crucial, and how you can use it to enhance your business operations.

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Why CMGR matters in financial analysis

Assessing growth status

CMGR provides insight into whether your business is growing, stagnating, or declining. By understanding this, you can determine if your current strategies are working or if adjustments are needed.

Predicting future growth

CMGR helps predict future growth by showing the average monthly growth rate based on historical data. This can be instrumental in setting realistic financial milestones and planning long-term strategies.

Monitoring expenses

CMGR isn’t just for tracking revenue; it can also monitor expense growth. If your expenses/purchases are growing faster than your revenue, it signals a need for cost optimisation.

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The formula for calculating CMGR

The compound monthly growth rate (CMGR) formula is used to calculate the average monthly growth rate over a specific period. The formula is as follows:

CMGR = (ending value / starting value)^(1 / no of months) -1

Steps to calculate CMGR

Step 1: Gather your data

Collect the starting value and the ending value of the metric you are analysing (e.g., revenue, user count, profit). Also, determine the number of months over which the growth occurred.

Step 2: Apply the CMGR formula

Use the CMGR formula to calculate the growth rate.

Applying the formula step-by-step

Example:

Let’s calculate the CMGR for a company's revenue growth over a 12-month period. Assume the revenue at the start of the period was $10,000, and at the end of the period, it was $20,000.

Step 1: Identify values

• Starting Value (SV): $10,000
• Ending Value (EV): $20,000
• Number of Months (n): 12

Step 2: Apply the formula

CMGR = (ev / sv)^(1 / n) -1

Plug in the values:

CMGR = (20000 / 10000)^(1 / 12) -1

Step 3: Calculate the ratio

EV / SV = 20000 / 10000 = 2

Step 4: Apply the exponent

2^(1 / 12)

Step 5: Use a calculator to find the result

Using a calculator, 2^(1 / 12); approx 1.05952121 ​≈ 1.0595

Step 6: Subtract 1

1.0595 −1 = 0.05951.0595 - 1 = 0.05951.0595 − 1= 0.0595

Step 7: Convert to percentage

0.0595 × 100 = 5.95%

Final result

The compound monthly growth rate (CMGR) for the company's revenue over the 12-month period is approximately 5.95%.

This process can be applied to any metric to find the average monthly growth rate over a given period, providing valuable insights into business performance and growth trends.

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Practical applications of CMGR

Annual return predictions

Use CMGR to estimate your company’s monthly growth, which can then be estimated to predict annual returns. This makes financial planning and forecasting more accurate and reliable.

Identifying growth trends

Maintaining a monthly CMGR record helps spot trends over time. Identifying these trends allows you to understand the factors driving growth and replicate successful strategies.

Tracking investment growth

CMGR is useful beyond revenues and profits. It can track the growth of your company’s investments, helping decide the optimal times to hold or exit investments.

Analyzing user growth

For digital businesses, user growth is a key metric. Tracking the CMGR of user growth helps evaluate performance and identify areas for optimization.

Managing expense growth

As your company grows, so do your expenses. Tracking the CMGR of your expenses against your revenues helps ensure that costs are controlled and growth is efficient.

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CMGR compared to other growth metrics

Compound annual growth Rate (CAGR)

Both CMGR and CAGR smooth out volatile data to determine a consistent growth rate. However, CMGR provides a monthly growth perspective, while CAGR is better for multi-year data.

Month-over-month growth rate

Month-over-month growth tracks monthly changes but doesn't account for compounding. CMGR, on the other hand, averages out data over several months, offering a more stable view.

Year-over-year growth rate

Year-over-year growth simply subtracts the starting value from the ending value each year. Unlike CMGR, it doesn't account for compounding gains or smooth out the data, making it less reliable for month-to-month analysis.

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Best practices for using CMGR

Verify your data

Ensure data accuracy by double-checking all inputs. Accurate data is crucial for reliable CMGR calculations.

Double-check calculations

Perform calculations twice to confirm accuracy. Consistent results indicate reliable data.

Maintain running totals

Keep monthly running totals of important metrics. This practice helps quickly identify trends and make timely adjustments.

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Using CMGR for strategic insights

Enhancing strategic planning

CMGR can provide valuable insights for strategic planning. By understanding your average growth rate, you can better predict future performance and set achievable goals.

Partnering with experts

To fully leverage CMGR, consider working with a finance professional. They can provide deeper insights and help implement strategies to maximize growth.

Ready to harness the power of CMGR for your business? Working with seasoned professionals can unlock the full potential of this metric, driving your business towards sustained success.

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Frequently asked questions (FAQs) about CMGR

How is CMGR different from CAGR?

While CMGR calculates monthly growth rates, CAGR (Compound Annual Growth Rate) calculates annual growth over multiple years. CMGR provides a more granular view, ideal for shorter periods, whereas CAGR is better for long-term trends.

Can CMGR be negative?

Yes, CMGR can be negative if the ending value is lower than the starting value, indicating a decrease in the metric being measured over time.

What is a good CMGR?

A "good" CMGR varies by industry and business goals. However, a positive CMGR consistently above the industry average typically indicates healthy growth. For startups, higher CMGRs can be crucial for attracting investors.

How do I calculate CMGR manually?

To calculate CMGR:

1. Divide the ending (last) value by the starting (first) value.
2. Raise the result to the power of (1 divided by the number of months).
3. Subtract by 1 and then multiply by 100 to get the percentage.

What data do I need to calculate CMGR?

You need the starting value, ending value, and the number of months over which the growth occurred. These values are typically gathered from financial statements or performance reports.

How often should I calculate CMGR?

Calculate CMGR regularly (monthly or quarterly) to monitor growth trends and make timely adjustments. Frequent calculations help in identifying issues early and leveraging growth opportunities.

Can CMGR be applied to different metrics?

Yes, CMGR can be used for various metrics such as revenue, user growth, expenses, and investments. It's a versatile tool for understanding different aspects of business performance.

What tools can help with calculating CMGR?

Several financial software and tools can automate CMGR calculations, including Excel, Google Sheets, and specialized financial analysis software. These tools often include built-in functions to simplify the process.

What should I do if my CMGR is declining?

If your CMGR is declining, investigate the underlying causes. Look into factors such as market conditions, customer behavior, and internal processes. Consider strategic changes, cost optimizations, or new growth initiatives to reverse the trend.

How does CMGR help in strategic planning?

CMGR provides insights into growth patterns, helping businesses forecast future performance and set realistic goals. It also aids in identifying areas for improvement, ensuring resources are allocated effectively.

By addressing these common queries, businesses can better understand and utilize CMGR, leading to more informed decision-making and enhanced growth strategies.

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