This measure is a simple measure of the relative importance of your general expenses and overheads to the sales you generate. It is a good tool for assessing falling net profit margins and understanding where falling margins are coming from, ie either your direct costs are rising, your expenses are rising or your sales revenues are falling
A key measure in understanding what is affecting your profitability is the Expenses To Sales income ratio. Therefore, this ratio tells you the relative importance of your general expenses and costs relative to your total sales income. If your ratio is increasing, this could indicate that your overheads and general expenses are increasing relatively to the rest of your business. Check your ratio now with Jazoodle.
Definition used:
Total Overheads (amount) Divided by:
Total Sales Income (amount)
eg: Total Overheads $20,000, Total Sales $100,000
Expenses : Sales equals: (20,000 / 100,000) * 100 = 20%
Finding your net margins are lower than you would like, the answer could be a rise in the relative cost of your overheads (General Expenses). The Expenses to Sales ratio will indicate this. To improve it, there are a few things you can try or assess further:
- You can negotiate better terms with your suppliers.
- You may be becoming less efficient with your support services and overheads Assess measures such as your overhead per employee, and net profit per employee – you may be over staffing
- Identify inefficient internal processes within your business. Are process problems creeping in, for instance, internal processes are not being adhered to?
- Identify if which, if any, of your general overheads are rising more steeply than others? It could simply mean that your staff hire policy is reliant more on contractors or vice versa
