Is my business efficient?

There are several ways to look at efficiency.  Here are a couple of my favorites.

  • Gross profit percentage.  In 30 years of finance, the truly successful companies I have worked with all had gross profit percentages of 40% or higher.  The goal for 40% margins makes a lot of sense once you consider that at least 10% will be swallowed up by general and administrative expenses (aka “blood-sucking overhead”).  Then there is sales and marketing.  Companies rarely grow unless they are spending 15% on sales and marketing.  Then there are income taxes to deal with.  So as you can see, a 40% gross profit quickly dissipates, and if you are managing well, a 10% net can be achieved.  Do you really want to work so hard for a dollar of sales if you get to keep less than 10¢?
  • Sales/Revenue per employee.  This metric gives an indication as to how effective your business is in generating revenue.  Many businesses create additional revenue merely by adding to staff.  Smarter businesses find ways to increase sales by having superior products, processes, marketing, etc. These companies get much higher valuations upon an exit.

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