There's Power in Ratios
Updated: Aug 5, 2022
Ratios are used in art, science, finance, sports – the list goes on and on. Whether it’s to create a visually-appealing aesthetic, assess a gambler’s risk, or provide a metric for business performance, a ratio informs proportions to attract the focus to important detail.
Ratios allow people to quickly identify patterns and patterns predict future outcomes.
Leveraging the odds in your favor requires knowledge, a level of skill and of course a bit of luck. If you want to successfully run a business and/or obtain investment, you’ll need a good understanding of key metrics and ratios. Acquirers also like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they will become with the idea of buying your business.
Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.
As the economy shifts and turns it is affecting so many companies and how we do business. Many are adjusting growth strategies and looking instead to scale their operation - creating efficiencies by systematizing and streamlining processes. Tracking these six power ratios now will help you spot trends, identify areas of opportunity, and build more 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.
2. 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 <insert your company name> 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.
Recently, Terri Wilcox published an article taking a closer look at the Net Promoter Score and how it works, as well as actionable takeaways. Check out “What Do They Really Think?”
3. 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 expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
4. 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.
5. 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.
6. Prospects per Visitor
What proportion of your website’s visitors “opt-in” by giving you permission to email them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advise 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.
In business, tracking and analyzing ratios can help improve efficiencies, decision making and ultimately the value of your company. If you’re planning to sell someday, remember that 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.
Author, Jane Drigans, is Chief Operating Officer with The Resultants®. To learn more about Jane, visit our Team Page or connect with her on LinkedIn.
Playing Offense in Uncertain Times
Join us at the fourth annual Twin Cities Business Growth Conference Thursday, November 3rd at the Golden Valley Country Club. Business owners and executives will be able to learn from one another and strategize with industry leaders - without the noise of an exhibitor hall or salespeople.
Headlining this year’s conference is keynote speaker, John Warrillow, founder of The Value Builder System™. A sought-after speaker, John has keynoted Fortune Magazine’s Growth Summit, Entrepreneur’s Organization New York City and Toronto Chapters, and the Inc. 5000 conference. He is also the author of two bestselling books and host of Built to Sell Radio, which is ranked as one of the world’s 10 best podcasts for business owners.
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