Operating expense ratio: how to calculate and read yours

Key takeaways

The operating expense ratio is operating expenses divided by revenue, shown as a percentage. It tells you how much of each pound of sales is spent on running the business. There is no universal good figure. The useful reading is your own trend: a ratio that rises for two years running means costs are outgrowing sales.

• Formula: operating expenses divided by revenue, times 100.
• 30% in our example: £180,000 of costs on £600,000 of revenue.
• Read the trend over three years, not one figure.
• A rising ratio means costs are growing faster than sales.

What is the operating expense ratio?

The operating expense ratio is a financial measure that compares the cost of running a business with the revenue it earns. It is calculated by dividing operating expenses by revenue. A lower ratio means more of each pound of sales is left for profit, reinvestment and the owner.

• How BPO can help businesses reduce operational costs
• What are operational costs? A plain guide for UK owners

How do you calculate it?

Divide total operating expenses for a period by revenue for the same period and multiply by 100. Use the same definition of operating expenses each time. In an illustrative firm with £600,000 of revenue and £180,000 of operating expenses, the ratio is 30%.

If the same firm grows revenue to £690,000 while operating expenses rise to £227,700, the ratio becomes 33%. Sales rose 15% but running costs rose 26.5%, and three more pence of every pound now goes on overhead.

• 1. Total twelve months of operating expenses.
• 2. Total revenue for the same twelve months.
• 3. Divide expenses by revenue and multiply by 100.
• 4. Repeat for the previous two years.

• Cost baseline: measure today's cost before you change it

What is a good operating expense ratio?

A good operating expense ratio is one that is stable or falling while service quality holds. Ratios vary too much between sectors to give one target: a consultancy that treats salaries as operating expenses will show a far higher figure than a wholesaler whose main cost is stock. Compare with your own history first and with close competitors second.

• Cost benchmarking: is your business expensive to run?

Why does the ratio creep up as a business grows?

The ratio creeps up when a business adds cost in steps and revenue in a slope. Each hire, each software seat and each new process is added to cope with growth, and few are removed. Coordination grows too: more people means more meetings, more handovers and more management.

The usual signs are flat revenue per employee and a payroll share that will not come down.

• Why profit margin falls as a business grows, and the fix
• Payroll as a percentage of revenue: what is too high?
• Diseconomies of scale: when a bigger team costs more

How do you bring the ratio down?

Bring the ratio down by lowering the cost of routine work per task, not by cutting capacity customers rely on. Split the ratio by cost type, find the type growing fastest, and look at the processes behind it. In service firms that is usually people time spent on admin and customer contact.

• Split the ratio into people, premises, technology and other costs.
• Find the group growing faster than revenue.
• List the processes that consume that group's hours.
• Standardise them, then decide what to automate or hand over.

• The cost lever scorecard: find savings process by process
• How to improve operational efficiency in a small business

What does the ratio not tell you?

The ratio does not tell you whether a cost is useful. It will improve if you stop answering the phone, and customers will then leave. It also moves when prices change, so a price rise can hide growing inefficiency. Always read it beside a quality measure and a unit cost such as cost per order.

• Cost reduction KPIs: the numbers that prove savings are real
• How to cut costs without hurting customer service

What does this look like in practice?

A pattern we see in growing UK firms: revenue is up every year and the owner is working harder for the same profit. The ratio, calculated for the first time, has risen several points in three years. The cause is rarely one large cost. It is usually a dozen routine tasks that grew with customer numbers and were never redesigned.

• See client work
• BPO Solutions for UK businesses

Operating expense ratio checklist

Run these checks once a quarter.

• Calculate the ratio for the last twelve months.
• Compare it with the previous two years.
• Split it by cost type.
• Note any price changes that flatter the figure.
• Read it beside revenue per employee and cost per task.
• Pick one process to improve before the next review.

• Revenue per employee: the number that shows real scale
• Work out your cost per task before you outsource

Next step

Send us revenue and operating expenses for the last three years. We will calculate the ratio with you and point to where the growth in cost is most likely coming from.