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    Accounting Standards Library
    Friday
    Aug102012

    What is organic growth?

    Organic growth is the increase in sales of a business generated by those of its operations that were in existence at the beginning of the measurement period.

    The concept is used to differentiate between sales generated from existing operations and those operations that were acquired during the measurement period. In particular, organic growth is used to determine whether existing operations are in a state of decline, neutral growth, or expansion. It is entirely possible that organic "growth" will actually be negative.

    For example, a company may report 100% growth during a period, but further analysis may reveal that 95% of the growth was from sales attributable to an acquisition, and 5% to existing operations.

    Organic growth can be caused by any of the following:

    • An increase in prices
    • An increase in units sold of existing products
    • Sales of new products from existing operations
    • Sales to new customers for products from existing operations
    • Sales generated by new distribution channels

    Organic growth nearly always refers to changes in revenue, but can be used in reference to changes in profitability.

    Related Topics

    Financial statement analysis 
    Incremental cash flow analysis 
    What are the components of cost volume profit analysis? 
    What is free cash flow? 
    What is the incremental internal rate of return? 

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