Blog: Five Power Ratios to Start Tracking Now

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 get the chance to try. In hospitals, staff-to-patient ratios help healthcare providers assess their resource management strategy to ensure that they have enough staff available to provide quality care to patients.

For businesses, especially those eyeing a potential sale, tracking ratios can be invaluable. Ratios offer a nuanced view, revealing the relationship between two numbers and providing deeper insights. Let’s delve into why they matter:

Benchmarking and Comparison

• Financial ratios allow business leaders to compare their company’s performance with competitors and others within the same industry.
• By analyzing these ratios, you can identify areas where your business excels and areas that need improvement.

Insights into Financial Health

• Ratios provide insights into a company’s financial health and performance.
• When buying a business, understanding its financial position is essential. Ratios help you assess whether the company is stable, profitable, and well-managed.

Risk Assessment

• Ratios help you spot potential risks. For instance, high debt ratios might indicate financial strain, while low liquidity ratios could signal cash flow issues.

Investor and Lender Confidence

• When seeking external funding (from banks or investors), financial ratios provide stakeholders with information. Lenders and investors use these ratios to assess whether the business can repay loans and generate a strong return on investment.

Often, we hear about Gross Profit Margin, Net Profit Margin and Operating Profit Margin. While there are others and some are industry dependent, below are five additional ratios you can start tracking now to enhance your business’s 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 to gauge customer satisfaction and loyalty. Survey customers with the question, “How likely are you to recommend our company to a friend?” Calculate the percentage of promoters (scores of 9 or 10) and detractors (scores of 0 to 6) to determine your NPS. The average company in the United States has a NPS of between 10 and 15 percent.  Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.  

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 to develop a relationship with each customer. 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.

Tracking financial ratios is essential for informed decision-making during business acquisitions. They provide a clear picture of a company’s financial standing and guide strategic choices. By tracking these ratios, you not only gain valuable insights into your business’s efficiency and performance but also make your business more attractive to potential acquirers, who value data-backed insights.

For more ideas on improving the value of your business, reach out to Certified Value Builder™ Advisor Beth Renga, Director of Consulting Services.