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Business Forecasting > Calculating Annual Growth Rates
There is a standard way to calculate average growth rates from your forecast or market data. It is normally called Compound Average Growth Rate (CAGR). You can use it to calculate monthly or annual growth rates from your forecast numbers.
As an example, say I want to project the market for eating and drinking establishments in Lane County, Oregon. I market restaurant equipment in Lane County, so the eating and drinking establishments are my potential market. I can go to the U.S. Census website's County Business Patterns database. The database shows that Lane County had 611 eating and drinking establishments in 1993 and 639 in 1996. The following illustration shows those numbers in a simple spreadsheet. I don't particularly like the fact that these numbers are several years old, but they are the latest available and they are also better than any other numbers I can find. I could count eating and drinking establishments by using the yellow pages in the telephone directories, or some other means, but any alternative would be impractical and expensive. So, I accept the latest available census data. To take these two numbers and use them to calculate the intervening growth, the standard formula is: (last number/first number)^(1/periods)-1 You can see that formula at work in the next illustration, in which a very simple spreadsheet calculates the CAGR from the two numbers. Average growth during that period was 1.505%. In the spreadsheet, the formula (shown in the edit bar) is located in cell B12 (column B/row 12). The formula identifies the last year as D12, and the first year as C12. The growth rate calculation produces the CAGR number showing in B12, 1.505%. In the next illustration we take the growth rate further in time. The formula for cell E12 (the next year), applies the growth rate in B12 to the last year's data in D12. You add 1 to the growth rate and multiply it to the previous year to get the next year's calculated amount.
NOTE: The $ symbol ($B12) means the formula applies the B column, even when copied to other columns. To convert this into a market forecast for a current marketing plan, we continue the same growth rate into the year 2000. Now we have the inputs to put into a market forecast table. The growth rate is calculated and applied to the future.
Samples from Marketing Plan Pro