In sports, a player’s efficiency isn’t simply measured by the number of times they accomplish something, but rather the ratio of one statistic versus another. Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which offers much more insight into actual performance.
For example:
- A quality point guard in basketball is measured not simply by how many assists they dole out, but by the number of assists compared to their number of turnovers. A higher ratio indicates a player with more positive than negative plays.
- In baseball, statisticians measure a player’s on-base percentage — the number of times they get on base as a percentage of the number of times they are at bat.
Acquirers of businesses also like tracking ratios, and the more ratios business owners can provide to a potential buyer, the more comfortable the acquirer will be with the idea of buying that business.
If you are planning to sell your company one day, here are six ratios you should consider monitoring in your business right now.
1. Return on sales
Also used interchangeably with the term “net profit margin,” this ratio reveals how efficiently your business converts sales into actual profit after accounting for all direct and indirect costs, such as operations, the cost of production or delivery, overhead, and taxes. Companies with high net profit margins tend to be efficiently run and financially sustainable.
A good return on sales ratio is generally from 5 to 10 percent, but it depends heavily on the industry in which the company operates. Monitor this ratio monthly. If it’s sliding, dig into your pricing strategy, supplier agreements, and labor costs.
2. Employees per square foot
By calculating the number of square feet of office space rented and dividing it by the number of employees, owners can judge how efficiently they have designed their space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.
3. Ratio of promoters to detractors
Fred Reichheld and his colleagues at Bain & Company and Satmetrix, developed the Net Promoter Score℠ methodology, which is based on asking customers a single question that is predictive of both repurchase and referral: “On a scale of 0 to 10, how likely are you to recommend my company to a friend or colleague?”
Figure out what percentage of the people surveyed gave it a 9 or 10 and label them “promoters.” Next, identify what percentage of people gave it a 0-6 and label them “detractors.” The Net Promoter Score is determined by subtracting the percentage of detractors from the percentage of promoters.
Bain & Company suggests any score above 0 is good, 20+ is favorable, 50+ is excellent, and 80+ is world-class. The global average is 32.
4. Sales per square foot
By measuring your annual sales per square foot (SPSF), 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 typical retailer is around $325.
- High-end luxury brands such as Apple and Tiffany & Co. report exceptionally high SPSF, often over $3,000, due to high-value products in smaller stores.
With real estate usually ranking as a business's second largest expense just behind payroll, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
5. Revenue per employee
Payroll is the number one expense of most businesses, which explains why maximizing your revenue per employee (RPE) can translate quickly to the bottom line. A good RPE ratio varies significantly by industry, company size, and maturity, but generally, a higher ratio indicates greater productivity and efficiency.
For certain labor-intensive industries, a range of $150,000 to $200,000 per employee is a suitable target. But a common rule of thumb is that each employee should generate three times their salary in revenue to cover their costs and contribute to profit.
6. Customer acquisition
Customer acquisition ratio compares a customer's total expected lifetime value to the cost of acquiring that customer. This metric tells you if the lifetime value of a customer is higher or lower than the marketing and sales costs to acquire that customer.
A healthy ratio is typically 3:1 or better. Ratios below this standard can imply inefficiencies, such as high acquisition costs or insufficient customer retention. Conversely, a ratio exceeding 3:1 might suggest opportunities to invest more in sales and marketing.
Conclusion
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 may be to them and the more likely your business may be viewed as best in class.
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