As part of our ongoing insurance how-to series we continue to explore the terminology and practices used in the Insurance world.
Today we will be looking at Operating Ratio and will explore:
- What is an Operating Ratio?
- How do you calculate an Operating Ratio?
- How can an Operating Ratio help me with my business?
An Operating Ratio is a means of monitoring the efficiency of a business in terms of its operating expenses against net sales.
Operating expenses normally include administrative costs, office expenses and selling and distribution costs.
Financial charges such as interest are normally excluded from operating expenses.
Operating Ratio is calculated as a percentage figure by applying the following formula:
Operating Ratio = Cost of Goods Sold + Operating Expenses / Net Sales x 100
A typical calculation may be made as follows:
Goods Sold = £360,000
Operating Expenses = £60,000
Net Sales = £600,000
In this example the calculation would be:
£420,000 / £600,000 x 100 = 70%
An Operating Ratio is an indicator of the efficiency of a business – a low Operating ratio will indicate high operating profit.
A low Operating Ratio is ideal because it indicates that in the event of a reduction in sales or revenue a company will be able to maintain profitability.
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