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What Is A 'Ratio'? (Measurement)

Calculating a Ratio is a method of comparing two measurements against each other. Divide your results by your input and you can get many useful relationships in your system.

Tracking Ratios is a great way to see how the system is changing and what direction is taking.

After running an analysis, it helps to construct Ratios in a creative way to see the most important parts of your system.

Josh Kaufman Explains 'Ratios'

A Ratio is a method of comparing two measurements against each other. By dividing your results by your input, you can measure all sorts of useful relationships between different parts of your system.

For example, assume that for every 30 customers that enter your store, 10 of them make a purchase. Your "closing ratio" would be 10 divided by 30: 1/3.

Let's say you train your sales staff in techniques that result in 15 paying customers out of 30 that enter the store. Your new closing ration is 15 divided by 30: 1/2.

Percentages are simply ratios with a base of 100. Your first closing ratio, converted into a percentage, is 33%. Your second would be 50%.

Think of a measurement like Return on Investment (ROI): you're simply dividing the amount of money you collect by the amount of money you spent, then subtracting 1.00. The result, when expressed in terms of a percentage, indicates your return.

For example, if you spend $2 million dollars and bring in $4 million dollars, your return would be 100%: $4 million (earned) / $2 million (spent) = 2.00 .00-1.00 = 1.00 = 100% return on investment

Here are some useful ratios to track:

• Return on Assets: for every $1 you invest in equipment, how much revenue do you collect?
• Return on Capital: for every $1 you borrow or take on in investment, how much revenue do you collect?
• Return on Promotion: for every $1 you spend in advertising, how much revenue do you collect?
• Profit per Employee: for every person you employ, how much profit does your business generate?
• Closing Ratio: for every prospect you serve, how many purchase?
• Returns / Complaints Ratio: for every sale you make, how many choose to return or complain?

Tracking ratios over time can provide a directional indication of how a system is changing. If your closing ratio or Return on Investment keeps going up, that's a very good thing. If it's going down over time, it would pay to investigate to find out why.

Be creative: study your business, then construct ratios that highlight the most important parts of your system.

Questions About 'Ratios'

• What ratios could you construct that would make it easy to see relationships between critical parts of your business?
• Which measurements are particularly important to compare? Are they important enough to be KPIs?

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"He who refuses to do arithmetic is doomed to talk nonsense."

John McCarthy, computer and cognitive scientist who coined the term "artificial intelligence"

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