What is Expense-to-Sales Ratio? – Formula and Ways to Improve Expense-to-Sales Ratio [With Examples]

What is expense-to-sales ratio?

Expense to sales ratio is a financial metric that compares a company's expenses to its sales revenue. It provides a measure of how much of the company's sales revenue is spent on expenses.

How to calculate expense-to-sales ratio?

To calculate expense to sales ratio, divide your ‘operating expenses’ by the ‘sales revenue’ for a given period of time, such as a quarter or a year. And multiply the result by 100 to get a percentage.

Formula for calculating expense-to-sales ratio

Expense-to-Sales Ratio formula
Expense-to-Sales Ratio formula

Real-life example of expense-to-sales ratio

Let’s say you run a SaaS company. Your operating expenses (sales, marketing, R&D, etc.) for the first quarter summed up to $50,000. And you achieved sales of $150,000 in the same quarter.

Then, your expense-to-sales ratio will be: 50,000/150,000 x 100 = 33.33%

What’s considered a good expense-to-sales ratio? (benchmark)

There is no ideal expense-to-sales ratio that applies to all companies, as the optimal level of expenses will vary depending on a company's industry, size, and business model. In general, a lower expense-to-sales ratio is considered better, as it indicates that a company is spending less of its sales revenue on expenses and may be more profitable. 

For a consumer company, the expense-to-sales ratio should be between 25% and 30% of net sales. For B2B, this critical ratio should range from 15% to 20% of net sales. However, a very low expense-to-sales ratio may also be a sign that a company is not investing enough in its business to support growth and long-term success. Companies need to strike a balance between managing expenses and investing in their business.

Ways to improve your expense-to-sales ratio

  • Increase your sales: One obvious way to reduce the expense-to-sales ratio is to increase sales. This can be done by implementing effective marketing and sales strategies, such as offering promotions or discounts, or expanding into new markets.
  • Cut down on costs: Another apparent way to reduce the expense-to-sales ratio is to cut costs. This can be done by reducing expenses in areas such as overhead, labor, and office space. For example, a company could negotiate better rates with suppliers or look for cheaper alternatives for software.
  • Diversify revenue streams: Diversifying revenue streams can also help to reduce the expense-to-sales ratio. This can be done by expanding the range of products or services offered, or by exploring new markets or business models.

Also Read: Related Metrics

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