Track these 6 ratios to build your business’s value
Ratios can be powerful. Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power
By ATB Financial 25 August 2022 3 min read
Ratios can be powerful. Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power. Business acquirers like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they’ll become with the idea of buying your business.
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 build 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’ve 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’s based on asking customers a single question that’s 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.
Your company’s NPS should be evaluated in comparison to the performance and benchmarks of other companies in the same industry. Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.
3. 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 roughly $1.94 million Canadian dollars in 2021, while a more traditional, people-dependent company may struggle to pass $129,000 CAD per employee.
4. Sales per square foot
By measuring your annual sales per square foot, you can get a sense of how efficiently you’re translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a well known 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’re likely to be.
5. Customers per account manager
How many customers do you ask your account managers to manage? Finding a balance can be tricky. Account managers with too many customers naturally won’t know their clients as well, while an account manager with the right amount can stay in contact on a regular basis.
It’s hard to say what the right ratio is because it’s highly dependent on your industry.
“Analysing historical ratios within your company is a great starting point to understand where the balance falls in your organization,” says Amna Rana, ATB Senior Manager Business Consulting. “Comparing this information to industry data can give you an idea of where you may want to consider making changes.”
6. Prospects per visitor
What portion 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 say that there’s no such thing as a typical opt-in rate since so much depends on the traffic source. They recommend that you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate, rather than benchmarking yourself against a competitor.
Acquirers love to see data. The more data you can give them—specifically in the ratio format they’re used to examining—the more likely a buyer will be interested in your business.