Happy Friday. In only a few hours, it is time for some Pinot Noir, rib eye, more Pinot, and perhaps a little Royal Painz. I didn’t think I would like the show (it’s on Netflix) but if you would like to see a MacGuyver-esque doctor who makes housecalls, you may enjoy it. It is also Rose Parade weekend in Portland! What plans do you have for this fun weekend?
I think a big part of why I enjoy accounting is that I get to see so many different things and work with so many different clients. Each client is unique and yet so very much like every other business:
They have a “goal of making money now and into the future.” (the Goal by Eliyahu Goldratt).
Making money is the primary reason for being in business because at the end of the day, the Company must pay its bills and provide a return to the owners. Anything less leads to the failure of the business.
I enjoy helping small business owners find ways to monitor how well they are doing in relationship to their goals and one area we spend quite a bit of time on is building key ratios and graphing them. I then teach and help the small business owner’s staff complete the ratio worksheets and help explain what is shown on the graphs.
Below are a few of the ratios I think are very helpful to most small businesses:
- Gross Profit per Labor Hour
- Marketing Expense per New Customer
- Website hits per New Customer
- Website hits per Business Inquiry
Some of the ratios above are lagging indicators and some are leading – meaning that some measure how well the business performs (lagging) and some measure how new business comes in (leading). Having a good mix of these measurements allows you to know quickly if your business is on track.
Naturally, these ratios assume that your accounting is current and you have developed ways to track the non-accounting data. It also is very helpful to set an expectation for your business so you know if everything is running smoothly or if adjustments need to be made.
Examining each ratio:
Gross Profit to Labor Hour
I like this ratio as it essentially turns every business into a “service business” by ignoring the Cost of Goods Sold. Gross Profit in a manufacturing business is essentially the amount of revenue available to pay the business and operating expenses. By starting the calculation with Gross Profit instead of Total Revenues, you can measure the impact of your labor on generating the money to pay the bills and earn a profit.
Marketing Expense per New Customer
This ratio helps you understand what it costs you to attract a new customer to your business. If you are spending $10,000 per month on marketing and attract on average 4 new customers, then the marketing expense per new customer is $2,500. By knowing what the lifetime value of a customer, you can begin to ask if we are getting enough new business in the door and if we are effectively closing sales.
Website Hits per New Customer
As you transition your marketing efforts to online, this becomes a very important indicator of your marketing performance. How many people come to your website and how many ultimately do business with you measures your site’s ability to educate and inform your prospects.
Website Hits per Business Inquiry
This ratio actually precedes the prior ratio by helping you examine your internet sales funnel at an earlier stage. How many web hits actually end up with the reader clicking “I want to know more?” You see that from this initial click, the ratio Website Hits per New Customer has more meaning as your chart can show the ratio between total page visits, total “interest” clicks and then number of new customers.
There are many different ratios that can help you manage your small business without having to get stuck in the details of your accounting system. Talk with your accounting professional about ways to look at your business without having to interpret your financial statements and that can keep you focused on your Goal. If you are not working with an accounting professional or would like to have a different set of eyes to help you, feel free to reach out to us at Currie & McLain. We are happy to consult with you at no cost and no obligation and help you see your business in a new way. And if you haven’t read the book, “The Goal” I highly recommend it. It is a fun story, easy to read and provides new insight into other ways to manage your growing business.
One thought on “Important Ratios for Your Busines”