PEOPLE SMARTS: Ratio, Ratio, On the Wall...

Sales, profit, pricing, budget to actual, projections, re-forecasting, plus the other transactions that take place in a business, make it difficult to stay on top of important trends. But that’s a pretty feeble excuse for not knowing the key drivers of your operation and the resulting financial trends.

One of the ways to monitor your business without having to look deeply into the financial details is to identify some key ratios that, if properly monitored, can give you a “heads up” on both positive and negative trends, especially regarding customer and people costs. Let’s take a look at a few.

Revenue to Expense. The ideal relationship between revenue and expenses is that revenue should grow at twice the rate of expenses. Obviously this is hard to do, but it does create a ratio that helps identify how much in revenue your company generates for every dollar of expense it incurs. Many very solid companies operate at a $1.50 to $1.65 revenue to expense ratio. Revenue to expense ratio = total revenues divided by total expenses.

Return on Space. Companies that are constantly trying to determine the most productive use of square footage and real estate might find this ratio an interesting one to watch. Return on Space = net profit after taxes divided by floor space.

Expense Growth. Expense growth from one year to another can be an elusive trend if you don’t have an easy way to check it. Look at this one along side growth in net sales. Expense Growth = total expenses minus expenses last year divided by total expenses last year.

Customer Growth. Real growth from one year to another can sometimes be determined by the growth in new customer counts. This is by no means an absolute indicator of growth but may be another key indicator worth tracking. This ratio tends to indicate a fundamental growth that is not affected by market changes or economic factors. Customer Growth = 100 times customers this year minus customers last year divided by customers last year.

Employee Turnover. Employee turnover is another good ratio to track. It should never be looked at in a vacuum, but should be tracked in concert with other important ratios that are indicators of the health of the business. Far beyond the impact turnover has on employees who actually leave a company, it is also an important indicator of management’s effectiveness in dealing with an increasingly scarce resource, its people. Employee turnover = 100 times employee terminations divided by average number of employees employed during the year.

Now, don’t go out and fire your accountant, bookkeeper or CPA after reading this article. Ratios are meaningless unless they are compared to something and tracked on a regular basis. Another trap with ratios occurs when we start to track so many of them that the process implodes from overanalysis and underuse.

All of us have certain blind spots and weaknesses when it comes to understanding and using good financial information. Determine what your blind spot is and then see if there is a ratio that, if identified and tracked on a regular basis, can give you a set of good questions you should be asking of those who do your books. Look at combining and tracking certain key ratios that might have cause-and-effect relationships. You’ll be surprised what you will uncover.

Larry Fish is president of GreenSearch, a human resource consulting organization. He can be reached at 888/375-7787, peoplesmarts@gie.net or via www.greensearch.com. PeopleSmarts® is a registered trademark of GreenSearch.