Business Ratios offer Key Insight for Business Owners
Ratios are powerful! A ratio expresses relationships much better than the blunt measuring stick of an aggregate number.
Baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base as a percentage of the number of times they try.
Potential business buyers also love tracking ratios and the more relevant business ratios you can provide a potential buyer, the more comfortable they will be with the prospect of buying your business.
If you’re planning to leave your company one day (and let me remind you, one day you WILL leave), here’s a list of ratios to develop and track.
And in the meantime, you’ll gather valuable insight you can use in running your business today.
Employees per square foot
By calculating the number of square feet of office space you rent and dividing it by your number of employees, you can judge how efficiently you have designed your space. Commercial real estate agents suggest a general rule of 175–250 square feet of usable office space per employee.
Ratio of promoters vs. detractors
Using the Net Promoter Score® methodology, which is based around asking customers a single question that is predictive of both repurchase and referral, you can determine your ratio.
Here’s how it works:
Survey your customers with the question “On a scale of 0 to 10, how likely are you to recommend us to a friend or colleague?”
Figure out the percentage of customers surveyed that give you a 9 or 10; label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage who gave you a 0–6 score.
Finally, calculate your Net Promoter Score by subtracting your percentage of detractors from your percentage of promoters.
Note: the average company in the U.S. has a Net Promoter Score between 10 and 15 percent.
Sales per square foot
Measure your annual sales per square foot for a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark; for example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’ largest expense, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
Revenue per employee
Payroll is the number-one expense of most businesses, which explains why maximizing your revenue per employee translates quickly to the bottom line.
Traditional people-dependent companies may struggle to surpass $100,000 per employee.
Customers per account manager
How many customers do you expect each account manager to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts and therefore don’t know each of their customers, whereas some high-end wealth managers may have just 50 clients.
The “right” ratio is highly dependent on your industry.
Prospects per visitor
What proportion of your website’s visitors “opt in” by giving you permission to e-mail them in the future? Experts recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by striving to beat your site’s current opt-in rate.
One of the easiest ways to increase opt-in rate is to reward visitors for submitting their e-mail addresses by offering them a gift they’d find valuable. Information products – such as online white papers, videos and calculators – make ideal, nearly free, gifts.
Prospects to customers
Another metric to keep an eye on is the efficiency with which you convert prospects (people who have opted in or expressed an interest) into customers.
In the end, acquirers have a healthy appetite for data.
Business owners should, too,
because these metrics will highlight areas to improve value and profit. The more data you have at your fingertips – in easy-to-understand ratio format – the more easily you’ll be able to run your business to be ready to leave it successfully.