John McCarthy, computer and cognitive scientist who coined the term “artificial intelligence” stated…”he who refuses to do arithmetic is doomed to talk nonsense.”

In the next few newsletters I hope to help you through some of the numbers of business.  Recently I wrote about KPIs, Key Performance Indicators.  Many of the KPIs in business take at least a basic understanding of a few mathematical concepts.  In this article I’d like to introduce or reintroduce you to Ratio.  Don’t run – stick with me – it will be painless, I promise, and if you need more help, just call for an appointment to work on the numbers for your business.

A Ratio is a method of comparing two measurements against each other.  In many cases we divide the results by the input……

For example:  out of every 30 customers you talk to, 10 of them make a purchase.  What is your “Closing Ratio?”    10 customers is the result.  30 customers is the input.  Divide the results (10) by the input (30).    10/30 = 1 out of 3, or 1/3.  One third of the prospects you talk to become customers, or 33.33%

What if you train your staff in new techniques and the results are that 15 customers make a purchase out of every 30 customers you talk to?  What is your “Closing Ratio?”    15 customers is the result.  30 customers is the input.  Divide the results (15) by the input (30).  15/30 = 1 out of 2, or 1/2.  With the changes you made, one half of the prospects you talk to become customers, or 50%.  Great improvement!

Some useful financial Ratios that might be appropriate KPIs in your business:

• Return on Marketing/Advertising – for every $1 you spend in marketing and advertising, how much revenue do you collect?
• Profit per Employee – for every person you employ, how much profit does your business generate?
• Returns/Complaints – for every sale you make, how many customers choose to return or complain?

There are a lot of other financial ratios like Return on Investment, Return on Assets, Return on Capital, Inventory Turns, Day Sales Outstanding that are helpful in determining the health of a business.  For a good book I recommend Financial Intelligence for Entrepreneurs by Karen Berman and Joe Knight with John Case.

Keeping track of your ratios, as Key Performance Indicators, helps you to track where your business is heading.  If your ratios begin to decline, step in quickly and make a correction to get things back on track.  If they are going in the right direction, determine why so that you can keep doing all the right things and celebrate your success!

If you need help determining your Key Performance Indicators, call 931-456-4910 and schedule an appointment.  We’ll help you with KPIs, ratios, and many other business topics.