- September 26, 2023
- Posted by: John
- Category: Data Analytics
A business efficiency analysis is important, not only because it gauges the current health of your business but also because it predicts where you can improve your business for better performance. Many elements go into a business efficiency analysis, but today we are talking about six critical metrics that play a role in developing a picture of your business’s health.
Metrics That Really Matter When it Comes to Business Efficiency Analysis
Operating Expense Ratio
The OER (or operating expense ratio) is one of the most popular metrics when measuring the financial efficiency of a business. An operating expense ratio measures the percent of your business’s gross revenue that goes into the operating expenses of your business.
So, for example, if a business has a 5% operating expense ratio, that is a business that is doing incredibly well.
If, however, a business has a 75% operating expense ratio, that business is not doing very well at all because three-quarters of the company’s gross revenue is going towards paying the operating expenses of the company.
In short – the lower your OER or operating expense ratio, the better your business efficiency.
Inventory Turnover Ratio
The ITR (or inventory turnover ratio) is an important metric for businesses that keep a physical inventory. An ITR measures how often inventory turns over within a specified period. An ITR is calculated by taking the total cost of goods your business sells, and dividing it by the average value of your inventory.
For example, if your business sells $50,000 worth of goods within a period and has inventory worth $1,000 – the ITR is 50. An ITR of 50 means your store sells inventory 50 times over within that specified time. Now, take a business that sells $50 worth of goods with an inventory worth $1,000 and the ITR is 0.05 – this business could use some help!
In short – the higher the ITR or inventory turnover ratio, the better.
Net Revenue Retention
The NRR (or net revenue retention) is a value that businesses use to track customer satisfaction with the products they sell. We calculate the NRR by tracking the revenue generated by existing customers. The higher the NRR ratio, the more satisfied customers are with the products they purchase. Ideally, the NRR is over 100% – if it isn’t, you need to find out why your customers are churning.
In short – the NRR should always be above 100%.
Human Capital Efficiency
The EE or employee efficiency is also sometimes called human capital efficiency, and it measures the employee headcount to the total revenue the company generates. The human capital efficacy is an important metric since employees are the biggest expense for most businesses. Employee efficiency is determined by dividing the recurring annual revenue by the number of full-time employees.
A higher HCE is more desirable because it means employees are more efficient, whereas a lower HCE is less desirable. A lower HCE also indicates that employees are not working as productively as they should be.
In short – the higher the HCE, the better.
We use sales efficiency to track how efficiently a company is generating sales. We calculate sales efficiency by dividing the revenue a company generates by the cost of sales and marketing invested in those products sold. Higher sales efficiency is more desirable because it means that the business is more successful and making more profit than it is paying out in cost.
In short – the higher the sales efficiency, the better.
LTV-CAC ratio is a ratio of the lifetime value of a customer divided by the average cost of acquiring new customers. This ratio determines how profitable new customers are. A higher LTV-CAC ratio means a more efficient customer acquisition plan and more profitable customers.
In short – the higher the LTV-CAC ratio, the better.
What Else Could You Learn from a Business Efficiency Analysis
Many more metrics go into measuring business success in efficiency analysis, these figures include:
- Asset turnover ratio (ATR)
- Customer acquisition cost
- Rule of 40
Business success isn’t only measured by these metrics, though. Any statistic that compares business output to business input can provide valuable information about business efficiency.
Having specific metrics available lets you to pinpoint areas where your business is falling short. Even if you have a successful business, there may be areas where you can improve processes to save your business money or increase your revenue.
For example, your business may be profitable, but you may also be paying far too much for materials. If you can pinpoint which materials you are paying too much for and get a better rate on those materials, your business efficiency will only improve. Or you might identify an area where processes can be improved through automation and save your business time as well as money.
Could Your Business Benefit from an Efficiency Analysis?
Every business can benefit from an efficiency analysis at least once a year if not once a financial quarter.
It may seem excessive to run this type of analysis multiple times a year, but it is a great way to catch slipping productivity or cash flow leaks before they become a big problem.
At Tekulus, we offer business efficiency analysis solutions for businesses small, medium, and large. Whether you are looking for regular analysis or one-time analysis, we can help. To start analyzing your business, contact us or just give us a call at 510-592-8530.