Doctors in
the developing world measure their progress not by the aggregate number of
children who die in childbirth, but by the infant mortality rate – a ratio of
the number of births to deaths.
Similarly, 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.
Entrepreneurs
buying businesses 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.
If you’re
planning to sell your company one day, here’s a list of six ratios to track in
your business now to use in creating a score card for potential buyers:
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
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 one million dollars in
2015, 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
e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of
Conversion Rate Experts, which advises companies like Google, Apple and Sony 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.
Entrepreneurs
looking to purchase a business 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.
Interested in
learning how to create a score card in your business that will help you to predict not
only the direction your business is going but how valuable it is to potential
buyers?
Contact
ActionCOACH Steve Goranson to schedule a free 1/2 hour Phone Strategy Session at
904-739-0200.
Steve
Goranson has owned and operated the Northeast Florida of ActionCOACH since
2004. ActionCOACH is the World's #1
Coaching franchise with over 1000 offices in 50 different countries. They coach
over 15,000 business each week worldwide.
Steve's
commitment is to help small business owners to develop actionable ideas that
will allow them to spend less time working "in" their business and
more time working "on" their business so they can build a more
valuable and sellable business. In the end, you’ll be spending less total time
working, will be making more money and will have truly created the company and
team you always dreamed of. In addition we will help you put the FUN back in
your business and your life.
Call
his office to schedule a free 1/2 hour Phone Strategy Session 904-739-0200 www.actioncoachsteve.com
