Business Alchemy 101 Lesson 20–Sales per Employee (Application)

This ratio is another ratio that is beneficial to track over a period of time. More important than the number is the change of the number over a period of time.

If the number drops quite quickly, it indicates either a rapid loss in sales, which would need to be analyzed, or it means that several new employees have been brought on recently.

Just as the change is more important than the number, so also is the explanation more important than the change. There is no reason to panic about a dramatic drop in the number if there is a good explanation. It is not going to be very likely that you will be unaware of a change in workforce or a drop in sales, so those make easy explanations and you will likely have a plan in place to improve those things. Just be aware of the small changes too–the unexpected things that tell a story you did not already know.

Also keep in mind that an increase is not always a good thing either. You can decrease your sales for the month and still increase this ratio by reducing your workforce. Again, know the story behind the changes.

This ratio can be used for targets as well. You may decide that you do not want to exceed a certain change in the number because then that means you have too few employees to handle customer service or production. In this case, you would set a max number for this ratio and make decisions to hire based on that ratio.

Always remember, when you have an explanation for the changes, you know how to handle the growth or reduction so keep an eye out for the unexpected changes.

Your business THRIVES on a solid FOUNDATION…

Business Alchemy 101 Lesson 20–Sales per Employee (Part Two)

This equation, similar to the Revenue per Square Foot equation, is quite simple.

NET REVENUE/# OF EMPLOYEES

So by using the methods discussed in the Understanding Ratios posts, we know that we want the Net Revenue to be the winner and that we are looking at the results from the point of view of the employees. So a higher number is better.

But what is a good number? We will discuss that in the next post.

Your business THRIVES on a solid FOUNDATION!!!

Business Alchemy 101 Lesson 20–Sales per Employee (Part One)

If you were in a little rowboat with a leak in it, you would be quite happy to have a bucket. The most pressing question you may have would be how many times you had to fill that bucket in order to keep your boat from sinking.

This scenario relates to the Sales per Employee ratio. Either because the business owner is quite wise and realizes and plans for bringing on help, or because the business owner is sinking in the water filled boat and screams for anyone to come help, businesses bring on employees as the workload expands.

Hiring new employees is like adding buckets and hands to help bail out the boat. The important point is to make sure that you are not bringing on too many buckets.

A good way to determine if the number of employees you have is appropriate for your business is to use the Sales per Employee ratio. By using this ratio, you can make sure that your workforce increases with your sales so that you do not end up with too many buckets bailing in the boat and not enough waterr to go around.

I will go over the equation in my next post.

Your Business THRIVES on a Solid FOUNDATION!!!

Business Alchemy 101 Lesson 19–Revenue to Space (Application)

There are many different ways that the Revenue to Space Ratio can be beneficial.  I will mention two of them here–a retail store and in making decisions about new spaces.

Anytime that you are selling in your store or office this ratio is useful. You may be a retail or wholesale store or even a salon or a professional office practicing law, medicine, accounting or the like. In any of these situations, it is important to know your Revenue to Space Ratio.

The second scenario that benefits from this ratio is when you are considering a move to a new office. Will the new space produce new revenue? If so, will it also increase the Revenue to Space Ratio? Is the increase in cost worth the move? This ratio can be used to determine the answers to those questions.

Additionally you may be deciding to downsize. If you downsize, will your Revenue to Space Ratio increase? You should be able to answer ‘Yes’ to these questions or the move may not be worthwhile.

Regardless of the situation, the underlying theme is always an assessment of how the size of your space affects your sales and if a different space would be more suitable.

Your business THRIVES on a solid (and appropriately sized) FOUNDATION!!!

Business Alchemy 101 Lesson 19–Revenue to Space (Part Two)

As you very well may have guessed, the equation for Revenue to Space is:

Revenue/Total Square Feet of Office

This can also be used for warehouses, plants, etc.

The result will be dollars per square foot and will give you an idea of the earning power of each square foot of space. Keep in mind that this is a sales ratio and other similar ratios will be discussed in future blogs.

Naturally, a higher amount per square foot is preferable. If you have questions on how to determine if the number is favorable or not, you can always check out the blog on understanding ratios.

There are several applications for this ratio and I will discuss them in the next post.

Your business THRIVES on a solid FOUNDATION!

Business Alchemy 101 Lesson 19–Revenue to Space (Part One)

One day when you have nothing better to do, take a roll of masking tape and mark out the floor of your whole office into a one-foot square grid. Count all of the squares and make note of how many squares there are in your office.

Next, take a huge jar of pennies and count them all. Divide the total pennies by the total number of squares in your office and then go throughout the office and place the same number of pennies on every square in the office.

Surely that sounds like fun!

This is a quick illustration of the Revenue to Space ratio. Instead of using a jar of pennies, you use your revenue and place the same amount of revenue in every square.

The equation for this ratio is quite simple and you have probably already figured it out, but I will still go over it in the next post.

Your business THRIVES on a solid FOUNDATION!

Business Alchemy 101 Lesson 18–Break Even Sales Factor (Application)

Spending money you do not have is very common in our society. Many people every day overextend themselves and then end up chained to a debt that grows and grows with no real hope of breaking free.

The cash flow of a business can be quite similar to this scenario. Quite often, a business owner will be passionate about improving and growing the business and spend money on advertising, equipment or man-power that will indeed grow the business but cannot be afforded by the business.

Though not quite as effective as the Contribution Margin analysis, the Break Even Sales Factor can be used to quickly ascertain a company’s cash position to help make decisions about how, when and how much to spend. Consider it wise to establish a base for spending.

For example, set a Break Even Sales Factor of 110% minimum before any cash can be spent to improve the business. That way, you have a sales goal to push for to budget for those important improvements. In doing this, you will be able to stay out of debt and continue to build your business with fewer stresses.

Your business THRIVES on a solid FOUNDATION!

Business Alchemy 101 Lesson 18–Break Even Sales Factor (Part Two)

The equation for this ratio is quite simple and here it is:

(Gross Profit/Total Expenses) X 100 = Break Even (as a percentage)

So to understand the results, we refer back to the article on Understanding Ratios. We want the Gross Profit to win, but we are viewing the ratio from the Expenses point-of-view.

This means that if we have a number higher than one hundred, then each dollar of expenses has to wipe out more than one dollar of gross profit, which means we are doing well. If the number is below one hundred, then each dollar of expense is wiping out more than one dollar of gross profit and we will not be seeing any net profit at the end of the day.

In more technical terms, if the result is higher than 100%, then we are higher than our break-even and adding profit to the company. The total expenses also gives us an idea on how much we need to sell in order to break even.

In the next installment I will go over briefly some applications of this ratio.

Your business THRIVES on a solid FOUNDATION!!!

Business Alchemy 101 Lesson 18–Break Even Sales Factor (Part One)

The Break Even Sales Factor is a very simplified way to find out how much you need to sell in order to turn a profit. The most accurate way to determine this is to use the method discussed under the Contribution Margin topic, but that way takes a lot more work.

To illustrate how this works, pretend I am back in elementary and I bring lunch to school. I have 10 friends that I eat lunch with and we have all agreed to share our treats with each other every day.

One day I have a bag of Goldfish crackers and there are 20 crackers in my bag. I hand out one little cracker to each friend and then there are ten left for me.

However, the next day I have fruit snacks and there are only 8 fruit snacks in my packet, so only 8 of my friends get fruit snacks and I do not get any.

This is how the Break Even Sales Factor works. My friends are all the expenses of my company. The treat is the gross profit of the company (Revenue minus Cost of Goods Sold), and the number of treats left over is the profit I get to eat.

I will go over the equation in the next post.

Your business THRIVES on a solid FOUNDATION!

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