Six Power Ratios to Start Tracking Now to Help Your Business Sell in the Future
Those that know me and the work we do in Methods for Management, know I enjoy numbers. Through MFM we measure nearly 150 KPI’s all relating to the dry cleaning clients we serve. Today, I would like to introduce 6 new power ratios to track for your business.
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.
If you know the movie “Moneyball” with Brad Pitt, you’ve seen this on the big screen.
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.
If you’re planning to sell your company one day, here’s that list of six ratios to start tracking in your business now:
2. 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. I have been in many plants over the years. Some use space very efficiently, while others have hired layout consultants who believe in spreading everything out to fill the given space.
1. 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?” There is a follow up question to this survey which is “Why did you score the way you did”? 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.
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. I did this and found one of my stores had an NPS of 100%, with zero detractors. I would like to think this is because of my leadership, but in truth, it is because of our phenomenal store manager, Joan. Joan is a wonderful person, a huge asset to our team, and understands our vision. Her customers feel welcomed, appreciated and listened to. Calculating your NPS and seeing where you have great success as well areas for improvement can exponentially improve both your customer experience and the profitability of your business.
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. Use this number to evaluate your front space or drop stores. You may find you need much less space that you thought. Finding the perfect size space may take some time. I have seen successful drop stores as small as 500 sq. ft, including the ADA compliant bathroom.
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. For the dry cleaning owner, this ratio can be applied to route customers. A very common question is always when will I know when to split a route, or conversely, can I combine two route and save the cost of a driver and vehicle.
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. Although we benchmark the MFM KPI’s, I have always felt it was more valuable to compare yourself to yourself. Am I getting better in the area or falling backwards?
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. Until next time, enjoy building value.
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How Business Coaching Can Help
Service companies, trades, restoration companies, dry cleaning businesses, laundry businesses come to me for assistance in:
- Developing systems to create smoother operation, improving processes and removing bottlenecks
- Implementing team management practices including meetings, delegation and working with challenging communication issues
- Interpreting financial statements and using the information to make better decisions and become more profitable
- Sales and marketing help to get better clients and bigger projects
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