|
The operating expenses to sales ratio provides an efficiency
measure of the cost structure of a business.
It gives an indication of the ability of a business
to convert income into profit. Businesses with low ratios
will generate more profit than others.
In general business operations with larger and more stable
cashflow can sustain higher ratios than smaller and less
stable operations. Scale and income stability are important
considerations though it is up to the management of a business
to monitor costs in an appropriate manner whatever its size.
There should be a balance between reducing or maintaining tight
control of running costs in the short term and reinvestment in
the future. This balance needs to be considered in terms of the
current needs and strategy of the business and where it is
heading in the medium to long term. You should seek professional
advice in considering these issues and this ratio.
Ratios should be considered over a period of time (say three
years), in order to identify trends in the performance of the
business.
The calculation used to obtain the ratio is:
Operating Expenses =
to Sales
Cost of Goods Sold + Total Expenses
- (Finance + Depreciation)
x 100
Sales
|
top