The importance of the preparation of financial statements is widely overlooked.
Many small business owners need their balance sheets and statements of profit and loss simply for compliance purpose.
It’s like doing it for the seek of pleasing IRS only.
What if I tell you the financial statements can help you monitor your business better and it can help you make more money from the bottom line?
There are tons of ratio analysis which will be helpful to you. Today I am going to share two important ratios with you.
More importantly, you may want to know the general benchmark of them.
1. The ratio of Labor to Sales
If you are in service type industry, labor cost is the most important cost to you.
If you can keep the labor cost (including payroll tax, employee benefit and the gross payroll) to sales within 40%, you will be easier to find your business profitable.
One common mistake for small business owners is omitting themselves in the labor cost. If you are running the business actively, ask yourself a question how much you need to hire at fair value to replace your role? Don’t overlook this cost when measuring whether your business is healthy.
2. The ratio of Rent to Sales
This is the major overhead, especially you are running retails.
It’s not easy to cut this cost once you commit to it. So be careful if you are thinking about expansion.
If you want to evaluate if the foot traffic bring you enough business, you want to compare the rent and the sales. Ideally, the ratio of rent to sales should be about 5% to 10%. In case this ratio goes over 10%, you really want to consider in depth if the sales volume is big enough to reward you while squeezing the net profit percentage.
I hope the above benchmarks will help you evaluate your current busienss as well as the potential new venture.
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