How to Understand Your Expense-to-Sales Ratio

The problem

Owners often look at expenses in dollars only. Without comparing them to revenue, it's impossible to tell whether spending is healthy or out of control.

A small business example

Business A: $100,000 revenue, $70,000 expenses → ratio 70%.

Business B: $400,000 revenue, $360,000 expenses → ratio 90%.

What the numbers mean

B earns 4× more revenue but keeps only 10 cents of every dollar. A keeps 30 cents. A is the healthier business.

Practical interpretation

Track the ratio over time. A rising ratio while revenue grows usually signals cost creep or under-pricing.

Action points

• Calculate the ratio monthly: (Total Expenses ÷ Revenue) × 100.
• Break the ratio down by category (rent, salaries, marketing).
• Investigate any category whose ratio is rising.
• Compare your ratio to your own past, not just to industry averages.