A Guide To Compound Monthly Growth Rate

There are several key metrics that business owners and executives should consider as they go about operating their businesses. One of those key metrics is known as the compound monthly growth rate, or CMGR. This figure is similar to the compound annual growth rate, or CAGR, in that it shows how metrics within your company are growing over time.

However, the CMGR is more granular than the CAGR, as it shows your month-to-month growth rate, rather than your annual growth rate. Below, we’ll talk about the CMGR, its importance in financial analysis, the compound growth formula, how to calculate yours, and more.

The Importance Of CMGR In Financial Analysis

The CMGR is an important metric in financial analysis because it shows the average growth rate your company can expect per month based on data from an extended period (usually six to 18 months). That could be the average rate of revenue growth, profit growth, expenditure growth, and more. This is important for a few reasons:

• State of growth: Your CMGR can tell you whether the average return on your business activities is shrinking, growing, or staying the same. This can tell you if you’re on the right track or if your business needs optimization.
• Future growth: You can also use your CMGR to predict the future growth of your company and determine how long it will take your company to achieve certain financial milestones.
• Expense tracking: Finally, you use your CMGR to track your expenses. For example, a growing CMGR on the expense side of the coin could outline an opportunity for optimization within your company.  

The Formula For Calculating CMGR

The compound monthly growth rate formula is as follows: CMGR = (FMV / IMV) ^ (1 / NOM) -1

Where:

• CMGR is compound monthly growth rate;
• FMV is final month’s value;
• IMV is initial month’s value; and
• NOM is number of months

Steps To Calculate CMGR

Although the formula above may make calculating your CMGR look like a difficult task, it’s actually quite simple. Follow the steps below to calculate the CMGR of any business metric that’s important to you.

Gather The Necessary Data

To take advantage of the compound growth formula in your business, you’ll need to start by gathering the necessary data. Keep in mind that you can use the CMGR to track and analyze any numeric data that either grows or shrinks monthly in your business. That may include revenue, profitability, number of employees, expenses, subscriber growth, active monthly users, and more.  

No matter what metric you use the CMGR to analyze, you’ll need the starting month’s value, the ending month’s value, and the number of months included in the dataset.

Apply The Formula Step-by-Step

Let’s say you own a SaaS company that generated $1 million in revenue in January 2023 and $1.7 million in revenue in December 2023 and you want to know the CMGR of your revenue. Here’s how the compound monthly formula would work in this scenario:

• Step 1: Divide your final month’s value by your initial month's value. In this case, you would divide $1.7 million by $1 million. That gives you a total of 1.7.
• Step 2: Divide 1 by the number of months included in the dataset. This can be confusing because this formula uses a base month. In this example, although there are 12 months included (January through December), January is the base month. So, you would consider the dataset to include 11 months (12 months minus 1, your base). So, 1 divided by 11 gives us a total of 0.09.
• Step 3: Bring your total from step one to the power of the total from step two (1.7^0.09). In this example, that’s approximately 1.05.
• Step 4: Subtract 1 from the total in step three. In this example, that comes to 0.05.
• Step 5: Finally, convert your answer from step four to a percentage. To do so, move your decimal point two places to the right and add a percentage sign to the end. So, in this example, your SaaS’s revenue is growing at a CMGR of 5%.

Applications Of CMGR In Business

Executive and finance teams can use the compound monthly growth rate in several ways to help improve their businesses. After all, the CMGR takes the volatility of month-to-month growth and smooths it into one constant rate of growth. That can make it easier to assess data and determine the following:

• Annual Return Predictions: You can use your CMGR to determine how much your company is likely to grow each month and use that to develop relatively accurate predictions of your company's annual returns.
• Periodic Growth Trends: If you keep a running total of your CMGR every month, it could make it easier for you to spot periodic growth trends. As such, you can determine what’s causing those trends in an effort to duplicate them.
• Investment Growth: The CMGR isn’t just applicable in terms of corporate revenues and profits; you can also use it to track the growth of your company’s investments and determine whether or not it’s time to exit.  
• User Growth: If you’re a digital company, there’s a high likelihood that your user growth is one of the most important measurements you track. Keeping a running total of your user growth’s CMGR can make it easier to understand your performance and find opportunities for optimization as they arise.  
• Expense Growth: As your company grows, your expenses will likely follow. However, it’s important that your expenses grow at a slower rate than your revenue and profitability. Tracking the CMGR of your expenses and comparing it to the CMGR of your revenues is a compelling way to determine how efficiently your company is turning costs into revenue.  

CMGR Vs. Other Growth Metrics

The CMGR is an important growth metric, but it’s not the only growth metric you should track. Here are a few others and how the CMGR compares to them:

• Compound Annual Growth Rate (CAGR): The CAGR is similar to the CMGR in that they both smooth out volatile data to determine a constant growth rate. However, the CMGR tracks shorter periods while the CAGR is better suited for data that spans several years.
• Month-Over-Month Growth Rate: Your month-over-month growth rate is similar to the CMGR in that it focuses on monthly growth. However, month-over-month growth doesn’t account for compounding gains — nor does it average out data over several months — making month growth metrics more volatile than the CMGR.
• Year-Over-Year Growth Rate: The year-over-year growth rate is similar to the CMGR because it tracks company growth. However, this growth rate is determined by simply subtracting the starting value from the ending value each year and it doesn’t account for compounding gains or smooth out the data.  

Best Practices For Using CMGR In Financial Analysis

The CMGR can be a valuable tool for financial analysis in your business. However, it’s also crucial that you use the tool properly. Here are a few best practices to consider as you deploy the CMGR to get a better understanding of your business’s growth:

• Verify Data: Data accuracy is key to the CMGR. One inaccurate bit of data will completely throw your calculations off. So, double- and triple-check your data.
• Perform The Calculation Twice: Make sure you do the math twice and compare your results. If they are the same, it’s unlikely that you made any mistakes.
• Keep Running Totals: If a metric is important enough to consider with the CMGR, it’s important enough to keep running totals each month. In doing so, you’ll be able to spot any changes quickly, giving you the opportunity to capitalize on positive changes and perform optimizations following negative changes.  

Leverage CMGR For Strategic Growth Insights

Whether you want to know your average growth rate or predict your future growth rates, the CMGR can help. This statistic can give you valuable insight into your company’s revenue, profitability, user growth, and much more.Ready to harness the power of CMGR for strategic growth insights? Partner with a seasoned finance professional to unlock the full potential of this valuable statistic for your business success.