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…
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!!!
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!!!
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!!!
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!
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!
A small business owner was having financial problems that were becoming serious. Checks bouncing, late payroll, and a thief were leading this business down into financial ruin. To help this business owner change financial tactics Foundation Bookkeeping introduced QuickBooks and several other processes to keep better track of the cash flow of the business.
Through introducing the right tools in his business, the financial status of his entire business is more stable and manageable. It takes more than a trick or two to organize and control a business’ books. As professionals whose goals are to help other businesses manage their finances effectively, Foundation Bookkeeping enables their clients to succeed without complete dependency on outside contractors.
There are important parts of of the financial aspect of a business that require knowledge of the workings of such tools that will help. As such, be aware of the opportunities you have to further educate yourself in practices that will enrich your business including all the options and opportunities that Foundation Bookkeeping offer.
Here is the equation for Deflated Sales Growth:
100 X[ [(Net Sales X (Price Index Last Year/Price Index))-Net Sales Last Year]/ Net Sales Last Year]
The top portion of the equation is asking first to find out what a dollar is worth this year compared to last year. This can be found at http://www.bls.gov/cpi/tables.htm. You want to look up the index number for last year and for this year and you are going to find a ratio (Price Index Last Year/Price Index) which will tell you that the value of a dollar is either more or less than it was last year, and by how much it is different. Continue reading
How much do you pay today for a gallon of milk? What about a year ago? The actual value of a dollar constantly changes and though there are other factors that go into the fluctuation of the prices of things, this is a major contributor. Continue reading
Roger has a concrete business and became frustrated with his bank account balance. He wasn’t sure where his money was going and why he wasn’t making as much money as he thought he was making. He kept replaying things in his mind, but just couldn’t figure it out.
Few people can play a complete chess game beginning to end in his or her mind. Business is so much more elaborate, but the same concept applies.
No matter how simple your business may seem, there are many working parts to keep track of and if you are like most business owners, keeping track of it all just in your mind is nearly impossible.
The daily planner people took this idea to the bank because they knew that something written down is much more easily achieved. The same is true when I begin consulting or preparing a managerial accounting system for a client.
The first thing that I did when Roger called me for help was map out every system and process so that we knew who was doing what and in what order. When this was down on paper, it became so much easier to lay out a plan for improvement and put together the numbers to do it.
We found several spots in Roger’s process that were less efficient and he has put together a plan to make improvements.
We have also put together the numbers for him so that he knows how much work he needs to break-even, how much it costs him to keep his doors open even if he isn’t doing any work and what his minimum mark up has to be in order to cover his costs.
Roger is no longer surprised by the amount in his bank account and knows how much money he can plan on having each month. Using these numbers, I have helped Roger put together a budget that includes getting him completely debt free in 18 months!
As a concrete guy, Roger understands the importance of a solid foundation. He knows that his accounting is the foundation of his business and that…
…Your business THRIVES on a solid FOUNDATION!!!