Tracking ratios are important tools business owners should use to determine the value of the business. It is also the type of data business acquisition teams look for when making a decision to buy. 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 tracking 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.
The more tracking ratios you can provide a potential buyer, the more comfortable they will become with the idea of purchasing 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.
Maximum Possibilities helps business owners to understand the different tracking ratios and begin using them now to ensure you are aware of your business’s valuation. Here’s a list of six ratios to start tracking now in your business to begin building 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. Tracking 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 zero to ten, 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 nine or ten, 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 zero to six. 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.
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 expense, 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. This explains why maximizing your revenue per employee can translate quickly to the bottom line. Google enjoyed a revenue per employee of more than $1.5 million dollars in 2021. Compare this to a more traditional people-dependent company which 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. Therefore they are unable to know each of their customers. Conversely, 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 and Apple 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.
Curious to See What Your Business is Worth?
Business buyers have a healthy appetite for data. The more data you can give them – in the tracking ratio format they’re used to examining – the more attractive your business will be in their eyes.
Maximum Possibilities can help you track and document the information you need to entice the perfect buyer for your business.
Let’s discuss what are the best tracking ratios to define your company’s valuation. Then we can make sure your expectations match the cold facts. Schedule a call today and let Maximum Possibilities help you calculate the correct valuation of your business.