How fast can your business grow without relying on outside funding? The answer lies in your internal growth rate—a vital metric for Australian SMEs aiming to scale sustainably in 2025.

What Is the Internal Growth Rate—and Why Does It Matter?

The internal growth rate (IGR) measures the maximum rate at which a company can expand its operations using only its own resources. In other words, it’s how quickly you can grow your business without borrowing or issuing new equity. For Australian SMEs, understanding this rate is crucial—especially in today’s environment of shifting interest rates, tighter lending conditions, and a renewed focus on financial resilience.

The IGR is calculated using retained earnings and net profit margins. It shows whether your current level of profitability and reinvestment can support your growth ambitions without exposing your business to the risks of external debt or dilution. In 2025, with the Reserve Bank of Australia (RBA) maintaining a cautious stance on rate cuts and banks tightening credit criteria, this metric is more relevant than ever.

How Is the Internal Growth Rate Calculated?

Understanding the formula behind the IGR will empower you to make better decisions about reinvestment and cash flow management. Here’s the standard formula:

IGR = (Return on Assets × Retention Ratio) / [1 – (Return on Assets × Retention Ratio)]

Where:

Return on Assets (ROA): Net income divided by total assets. This measures how efficiently your business uses its assets to generate profit.
Retention Ratio: The proportion of net income retained in the business (i.e., not paid out as dividends).

Example: Imagine a Melbourne-based manufacturing SME with a net income of $200,000, total assets of $2 million (ROA = 10%), and it retains 70% of its earnings. The IGR would be:

IGR = (0.10 × 0.70) / [1 – (0.10 × 0.70)] = 0.07 / 0.93 ≈ 7.5%

This means the business can grow its assets by 7.5% per year using only retained profits, with no need for outside capital.

Why IGR Is Especially Important for Australian SMEs in 2025

1. Tighter Credit and Lending Standards

In 2025, the RBA has kept the cash rate steady, but major banks have not eased lending requirements, citing persistent inflationary pressures and global economic uncertainty.
Many small businesses face higher hurdles to secure finance, making organic growth through retained earnings more attractive—and sometimes, necessary.

2. Government Policy Shifts

The federal government’s 2025 budget increased support for SMEs investing in technology and skills, but direct subsidies for expansion remain limited.
Programs like the instant asset write-off (now capped at $20,000) support reinvestment, but businesses still need to fund most growth internally.

3. Investor and Stakeholder Pressure

With ESG (Environmental, Social, Governance) and sustainability reporting now mandatory for many mid-sized companies, investors increasingly scrutinise balance sheet health and prudent growth strategies.
Demonstrating a strong IGR can position your business as low-risk and well-managed—crucial for winning long-term partnerships and contracts.

Boosting Your Internal Growth Rate: Practical Strategies

Improving your IGR isn’t just about cutting costs. It’s about making smarter operational and strategic choices. Here’s how Australian SMEs can lift their internal growth rate in 2025:

Increase Profit Margins: Streamline operations, negotiate better supplier terms, or introduce higher-margin products/services.
Retain More Earnings: Reinvest a higher proportion of profits rather than distributing them as dividends. This requires buy-in from stakeholders but pays dividends (pun intended) in long-term value.
Asset Efficiency: Use technology to make assets work harder—automation, AI-driven inventory management, or energy-saving upgrades (especially with government green incentives in play).
Tax and Grant Optimisation: Leverage all available tax offsets, R&D incentives, and digitalisation grants to reduce cash outflows and boost retained earnings.

Case in point: A Sydney-based SaaS provider used the Digital Solutions Grant to automate its customer onboarding, improving ROA and freeing up cash for reinvestment—lifting its IGR from 6% to 9% within a year.

Measuring and Monitoring IGR: Your Next Steps

In 2025, financial software platforms like MYOB and Xero have built-in dashboards to track your IGR in real time, making it easier than ever to set benchmarks and monitor progress. Regularly reviewing this metric alongside other KPIs (like debt-to-equity or working capital ratios) will help you stay on top of your business’s financial health and resilience.

Remember, a healthy IGR isn’t just a number—it’s a sign of your business’s ability to thrive through cycles of uncertainty, policy change, and market disruption.