Profitability ratios

Ratio Possible interpretations

Expense Ratios

This is another good internal measure in relation to sales. How much are you spending on the overheads or indirect costs? Most organisations will have a manager responsible for different aspects of the overheads and it’s their responsibility to provide you with information that may effect the balance between their costs and the activity of the organisation.

A growing organisation would initially expect to see economies of scale and therefore see expenses reducing as a percentage of income. However, rapid long-term growth will usually lead to the company having to invest in additional overheads (or fixed costs) and this will have a negative impact on this ratio in the short term.

An organisation that restructures its costs between direct (variable) and indirect (fixed) will also see changes in this ratio. Good managers will have predicted these in their forecasts and they should not come as a surprise to the accountants for the organisation. This ratio is appropriate to the public sector. For the purpose of assessing the controls, you should consider the total budget allowance as income and look at the expenses as a percentage of this.