Business Ratios for a healthy small business

business ratios

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Business ratios that measure your small business

Six Power Ratios to Start Tracking Now in your small business

 

These six power ratios are designed to measure the heart of your small business

Doctors monitor the health of humans, why not measure and plot the health of your business. These powerful ratios help you track how healthy and well your business is going.

Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of six ratios to start tracking in your business now to start building value:

  1. Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.

  1. Ratio of promoters and detractors

Fred Reichheld and his colleagues at Bain & Company and Satmetrix developed the Net Promoter Score® methodology.

It is based on asking customers a single question that is predictive of both repurchase and referral.

Here’s how it works:

Survey your customers and ask them the question, “On a scale of 0 to 10, how likely are you to recommend to a friend or colleague?”

Figure out what percentage of the people surveyed give you a 9 or 10, and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a score of 0 to 6. Then calculate your Net Promoter Score (NPS) by subtracting your percentage of detractors from your percentage of promoters.

The average company in the United States has an NPS of between 10 and 15 per cent.  Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.

  1. Sales per square foot

By measuring your annual sales per square foot, you can get 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’s largest expense, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

  1. Revenue per employee

Payroll is the number one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. Google, for example, enjoyed a revenue per employee of more than $1.5 million dollars in 2021, whereas a more traditional people-dependent company may struggle to surpass $100,000 per employee.

  1. Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky.

Some bankers are forced to juggle more than 400 accounts, and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with.

It’s hard to say what the right ratio is because it is so highly dependent on your industry.

Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.

  1. Prospects per visitor

What proportion of your website’s visitors “opt-in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google and Apple on how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

These ratios are not the only ones you can use but they are a big start. Look at what drivers are in your business and start plotting the pulse of your small business.

Hot coffee is a great way to sit back and evaluate where you are going. Geoff and his team are happy to run a health test and strategy on your business, just reach out to 95979966

When considering selling your business Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes.

Action to take now – enjoy a healthy business

 

Start using these six powerful ratios and get your business pumping out rivers of profits and you enjoy your business freedom and a healthy business.

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