The gross sales to equity ratio, or GSE ratio, compares the relationship between an organization's sales and its financial leverage. It is a performance ratio, which indicates how well the business is meeting its sales targets, and it is also an efficiency ratio, which lets the business know how well it is doing in managing its money.
Calculating Gross Sales to Equity
To calculate the GSE ratio, simply divide gross sales by total equity. Gross sales means the amount of sales a company makes before it deducts customer discounts or taxes. It is calculated by adding together all of the sales invoices. Equity is the total amount of stock or other shareholder interest. If your business has $25,000 in gross sales and total equity of $10,000, then the GSE ratio would be 2.5.
What GSE Indicates
A higher GSE ratio indicates that the business is able to create sales without a high level of investment from stakeholders. In other words, it means your business isn't relying on investment to drive its financial needs. If, on the other hand, the GSE was 0.3, this would indicate that the total amount of investment far exceeds the amount of sales the company is generating. The business would be considered to be neither very productive or very efficient.
Responding to GSE
Business owners and managers can use the GSE ratio to set sales targets and stakeholder investment goals. Your company might wish to get its GSE above 1.0. To do this, it would need to increase its sales and perhaps lower the amount of outsider investment it obtains. Conversely, increasing the sales targets dramatically will allow the business to retain its current level of investment. To an employee-owned business or sole proprietorship, the GSE ratio serves as a warning to the owners to improve their gross sales in order to help keep the company solvent. Increasing marketing and advertising activities, discounting products or merging with another organization are ways to dramatically change the GSE.
Benefits
While the GSE ratio may seem like a high-level financial activity for small businesses to undertake, the calculation can be extremely beneficial in helping to direct the company's productivity and sales targets. A low GSE might alert you to possible competition in the marketplace. A high GSE, on the other hand, might let you know that a new marketing plan that has recently been initiated is working. Finally, the ratio is useful in revealing when an organization relies too heavily on investor funding to fuel its liquidity.