Between managing growth and managing day-to-day, it’s easy for any business owner to overlook the inner workings of the business. Efficiency in both operations and finances is key to increasing results. To know the level of efficiency in your business, you must first develop the measurement tools that would help you identify inefficiencies. Ratios are a good measurement tool that can provide you with a wealth of information about your business.

Here are some examples of proportions that can help:

• Total Income / Total Hours Paid
• This ratio would help you determine if your work hours are consistent with the amount of income generated in a given period. The results will be the amount of money that the company generates for each paid employee hour. Calculate this ratio on a monthly basis, if there are large fluctuations from month to month, you need to investigate and find out the reason for such fluctuations.

• Overtime paid / Total hours paid
• This ratio will help you determine the percentage of total hours that you pay overtime. The rate varies by industry and the size of your business, however a 10% overtime rate is acceptable. This should also be calculated on a monthly basis and compared to your overall income. If earnings are declining, you should expect your overtime rate to decline as well, and vice versa.

• Total labor expense / Total income
• For most businesses, labor is the highest cost they have as a percentage of revenue, so it’s not unusual for 50% or more of their revenue to be in payroll-related expenses. This estimate should be consistent with your income. If revenues decline, you should see a decrease in labor expenses accordingly, and vice versa. This calculation will also help you determine where the company stands against its competition, as well as the industry.

• Days of sales pending (DSO)
• This ratio measures the number of days it takes you to collect the income made on account. The calculation is simple: (Accounts receivable / Total credit sales) x Number of days. The lower the result, the faster you will collect cash. If you are extending the terms of Net30 to your clients, the result should be no more than 40 days; If so, you should step up collection efforts to reduce the figure. A high DSO means slower cash flow, which may require the business to purchase a line of credit or carry over credit card balances and therefore incur interest expense as a result.

These are some of the many ratio calculations you can perform to ensure a smoother running operation and a more profitable business. The intention was simply to give you some examples of how proportions can be used to help you better run your business. The above proportions can be used and are equally effective in companies of any size.