What do we mean by sales ratios or averages and why does knowing them make your planning easier?
The phrase sales ratios covers a multitude of sins and a bit like the famous 80:20 rule, can be used in a whole host of situations. Some of the more frequently used ones that many may be aware of are appointment rates and conversion rates.
As with so many things in business it always helps to begin with the end in mind (thanks Mr. Covey). So let’s begin with the hypothetical notion that we require £10,000 in sales this month. Whether that is feasible or not can quickly be determined by studying your sales ratios and averages. If you are aware of your average order value you can predict how many orders are required to achieve £10k in sales in an average month.
This can then be taken much further by continuing to work backwards towards your source activity. If your average order value is £1000 then you know you need 10 orders; you also know your conversion ratio, let’s say it is 50%. With such a conversion ratio you know you need 20 appointments to achieve 10 orders. In order to gain 20 appointments, if it takes 10 calls per appointment, you will have to make 200 calls per month.
Sales Ratios – If you know them you can manage them
Peter Drucker once said “If you can’t measure something, you can’t manage it.” This is a perfect example of that rule – by knowing your sales ratios you can manage them to make sure that they are holding up or improving. Only by knowing your averages can you look to gain effectiveness in areas i.e. by increasing your conversion rate to orders or by becoming more effective at appointment setting. It also helps you to know at a glance what is required to achieve your figures and whether they are realistic.
These figures can be taken to another level by knowing, for example your average lead time from appointment to order, your average order lead time and your average debtor days (how long from invoice to receiving monies from customers). This enables you to both manage customer expectation in terms of lead time and also to manage your cash flow. A full order book is one thing but means nothing if the cash flow doesn’t follow on too.
Another simple way sales ratios can dramatically help your business is by looking at average profitability of different products and services. This can very quickly tell you your ideal customer profile from a profitability viewpoint. It may also open your eyes to how some large customers that drive your prices down are in fact not adding to your bottom line at all.
So by knowing your sales ratios you can very quickly and effectively manage your business activities. If you can manage them you are then in a position to understand them and improve them so that your time, the most precious commodity of all, is being used to maximum effect.
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