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
- Sales generated in new sales regions
Organic growth nearly always refers to changes in revenue, but can be used in reference to changes in profitability or cash flows.
The organic growth concept is a solid growth strategy for many businesses. This approach depends on internally-generated growth, rather than through acquisitions, and is a particularly viable option for a business that does not have sufficient cash to acquire other entities. However, this type of growth tends to be rather slow, especially when compared to the massive sales gains that can be achieved through an acquisition strategy. Also, organic growth could be in a sales segment that does not generate much cash flow, whereas an acquisition could generate sales in a more profitable segment of the market.