How to use the operating expense ratio calculator
- Enter your operating expenses for a period and your revenue for the same period. For a rental property, use effective gross income as revenue.
- Decide what counts as operating expenses before you start, and keep that definition the same every time.
- Optionally open the advanced options and enter a target ratio to see the expenses that would match it.
- Read the ratio as a percent, the expenses per dollar of revenue and the revenue left over after the expenses you entered.
Formula
Operating expense ratio = operating expenses / revenue x 100%
Expenses per $1 of revenue = operating expenses / revenue
Expenses at a target = revenue x target ratio / 100
Both amounts must cover the same period. The ratio can be above 100 percent if expenses are larger than revenue.
A small business with $120,000 of revenue
A business spends $30,000 on operating expenses in a year with revenue of $120,000. The operating expense ratio is $30,000 / $120,000 = 0.25, or 25%. Each dollar of revenue carries 25 cents of operating expenses, and $90,000 of revenue is left after those expenses.
If the owner wants a ratio of 20 percent, expenses would need to be $24,000, which is $6,000 lower than they are now.
Defining operating expenses
There is no single definition that every business uses. Some include the cost of goods sold, some leave it out and treat it separately. Some include depreciation, others do not, and interest and income taxes are usually excluded. In real estate the ratio is operating expenses divided by effective gross income.
What matters is consistency. If you change what is included from one period to the next, the trend will mislead you. Write down your definition beside the number.
Using the ratio
The ratio is a quick way to see how much of each sales dollar goes to running the business. A falling ratio can come from higher sales on the same costs or from lower costs, so look at both amounts as well. Whether a given ratio is acceptable depends on the type of business, so the tool does not rate it.
For related views of profitability see the profit margin calculator and the break even calculator. To see how sensitive profit is to a change in sales, use the operating leverage calculator.
Assumptions and limits
- Operating expenses and revenue cover the same period and use the same definitions every time.
- Revenue must be above zero. Expenses can be zero or more.
- The revenue left over is revenue minus only the expenses you entered. If cost of goods sold is not in your expenses, it is not in that figure either.
- Results are rounded to two decimals.
Frequently asked questions
How do you calculate the operating expense ratio?
Divide operating expenses by revenue and multiply by 100. For $30,000 of operating expenses on $120,000 of revenue, the ratio is 25 percent.
What is a good operating expense ratio?
It depends on the industry, the size of the business and what you include as expenses, so there is no single answer. Compare your ratio with your own earlier periods, and with similar businesses only if they define it the same way.
Does the operating expense ratio include cost of goods sold?
That is a choice of definition. Some businesses include it and some do not. The tool uses whatever you enter, so decide first and apply the same rule every period.
How is it used for rental property?
Investors divide yearly operating expenses, such as taxes, insurance and maintenance, by the property's effective gross income. Mortgage payments are normally left out.