How to Calculate the Percentage of Sales to Expenses Percentage of Sales Method. Your foundation is in place, your income streams are prepared. Head on over here to read it: An Intro to the Profit First System for Solopreneurs! Unfortunately, checking your bank balance is not enough to go off of to assess your business’ finances. The cost is variable and changes to a different percentage of sales in response to a different volume level. Yes, of course! There are three main "high growth tech businesses" people talk about most of the time these days - SaaS, eCommerce and advertising. Here is an example, using figures from a company's balance sheet: You want to know the percentage of sales to administrative expenses. Overhead is not a percentage of costs or sales. For hospitality businesses, wages typically run at about 25% of sales. Guidelines While there is no blanket standard for how much each business should spend on payroll, considering some guidelines can help business owners determine whether they are on the right track. Total payroll cost should not exceed 30 percent to 35 percent of total sales for full-service operations, and 25 percent to 30 percent of sales for limited-service restaurants. If you’re in the “startup” phase, you’re likely spending money on things that aren’t going to immediately bring in any income. Multiply .475 by 100 to get 47.5%. I recommend investing in a good website that you own, yes. Don’t just make an excuse to avoid facing the reality that your business is hurting for cash. Ratios should be considered over a period of time (say three years), in order to identify trends in the performance of the business. Other companies may put marketing employee expenses into general and administrative expenses, sales, or other areas. If you earn at least a consistent $2,500 a month, your 30% threshold is $750. He also decided to provide a discount of 5% on every calculator. Best practices in managing restaurant costs recommend consistently comparing what should have happened (theoretical CoGS) with what actually happened (actual CoGS) – and then work on narrowing the gap. What percentage should labor cost be in a restaurant? For example, maybe you don’t mind taking a lower salary because money isn’t why you run your business. Your operating expense ratio is your operating expenses divided by your revenue. So when you total up your regular expenses (don’t forget to factor in those quarterly and annual expenses! The percentage of sales method can also be used to forecast other balance sheet items that are closely associated with sales, such as inventory, accounts payable and accounts receivable. I’d like you to challenge yourself. With a capital B. See you next week. If you bring in $100,000 a month in gross profits and spend $20,000 on operating expenses, your profit margin is … You should spend 2–5% of your sales revenue on marketing. The calculation used to obtain the ratio is: Operating Expenses = to Sales Cost of Goods Sold + Total Expenses - (Finance + Depreciation) x 100 Sales The end, have a nice day. Labor costs are rising, period. Multiply by 100. This method is used by business owners and employees within a business who create budgets to determine if the ratio of expenses to sales is appropriate. To get an overall picture of the ideal profit margin, you’ll first need to know how to crunch the numbers. What is the Percentage-of-Sales Method? Apparently!). Tip. Free shipping is a powerful marketing tactic, but can you afford it? I definitely recommend the book!). The larger issue is what to do with that number. His system guarantees profit. The percentage of sales method is a tool for forecasting and budgeting. Wait, bar and game staff often run lower, though. One of the first hurtles any business owner must clear is payroll expense. Second Wind Consultants has worked with hundreds of business owners to identify Key Performance Indicators (KPIs) that will give you a birds-eye-view of where your cash flow is allocated. But even the solopreneur-honeymooners have to acknowledge that there’s a point where it all levels out. Here’s another thought! The percentage-of-sales method is used to develop a budgeted set of financial statements.Each historical expense is converted into a percentage of net sales, and these percentages are then applied to the forecasted sales level in the budget period. How’s that for incentive? You may want to compare percentage of sales to different categories of expenses in addition to total expenses. I’d probably average them out over time as a rough baseline) and your total GROSS revenue, you should be able to determine your current percentage. It is also intuitive. How to calculate the percentage. What about when you’re considering a new monthly expense? I didn’t make up the 30% rule. When analyzing figures in business, it is helpful to know how to calculate the percentage of sales to expenses. Just divide the expenses by the income number and multiply by 100! Calculate the expense ratio by dividing your operating expense by your net sales and multiplying the result by 100. He has various recommended percentages for various sized businesses, but those of us in the smaller blogging, digital products, and service-based business spaces all likely fall in the <$250k in Annual Revenue category. For example, purchase discounts may be applied to purchases once a unit count passes, say, 10,000 per year. Since minimizing expenses in all areas should be a priority for the savvy business owner, consider looking at payroll costs as a percent of revenue, rather than a percent of expenses. We’ve got work to do! These ratios are usually categorized as follows: To reach your revenue number, use your gross revenue minus sales taxes or items such as freight charges that you collect but then pass on to … If you’re like I was and you’re coming across this concept for the first time, it might just be blowing your mind. It’s very likely that it’ll take you a few months after creating your website to generate enough traffic to start making your first sales (this applies for affiliate, digital product, services, ads, and other types of "income” activities). Otherwise, you’re robbing your business (profit), yourself (owner’s compensation) and the government (tax)!! And, because his recommended allocations include other funds, his system also guarantees tax savings and a paycheck for YOU. ... a worker who earns $20 per hour with a 50 percent burden expense … Unfortunately, that question doesn’t have an easy answer. If you’re making money relatively consistently (you can bring in something monthly), you’re out of the startup phase. This means that, for the period analyzed, 47.5% of your sales goes toward expenses. Normally, CoGS is expressed as a ratio of a percentage of cost-to-sales. Oh, wait - you want to know why? Gross margin reflects the cost of goods sold before other sales costs are subtracted. Online business owners like us don’t have a lot of overhead expenses needed to run our business. What percentage of sales should you spend on logistics? If you don’t have to pay for it, don’t pay for it. Other industries, including the food and hospitality fields, often see that percentage come in closer to 30-35%, and it can easily be up to 50%. For example, if you want to decrease your percentage of sales to administrative expenses, you need to implement strategies to increase sales, decrease administrative costs, or both in order to change the ratio. Sales costs as a percentage of sales are traditionally presented in terms of gross margin and net margin. So when you total up your regular expenses (don’t forget to factor in those quarterly and annual expenses! Many of us are going to be over that, when we take a look at our own Profit & Loss Statements. But if you’re close to there, or maybe even below that number, challenge yourself to keep the percentage lower. MailerLite’s free plan should be plenty! So I want to applaud you! To find your ideal food cost percentage, you first need to know two values: Total food costs; Total food sales; Let’s say their total food costs were $2,500 and, as we see above, their total food sales are $8,000. If you follow the Profit First system, you’ll have an Operating Expense fund that will tell you the exact amount of cash you have on hand that’s available for spending. As well as actual dollar amounts spent, you can quickly calculate the percentage of sales. Example: Let’s say you made an average of $1,000 a month over the last several months. If the total net sales for the period is $100,000, the company establishes an allowance for doubtful accounts for $3,000 while simultaneously reporting $3,000 in bad debt expense. The magic number I have for you today is a percentage of your income. Divide the sales expenses by net sales, then multiply by 100: From the above example, you can see that sales expenses have a higher percentage of sales than do administrative expenses. The result is the percentage of sales to expenses. It may take a few weeks or even months to see a trend in average weekly sales. Divide your expense total by the sales revenue total. The formula used to calculate gross margin is gross profit, which you can find in the top section of the company's income statement, divided by total sales or revenue. Just divide the expenses by the income number and multiply by 100! Denise Dayton, M.S., M.Ed. Copyright 2020 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. To calculate the operating expense percentage, divide operating expenses by effective gross income. For example, paying for web hosting to set up your first website. Download a report with benchmark data, a definition, and details for tracking this metric. You can use this Roster Coster Calculator to make sure that your wage costs do not exceed your target percentage of sales. These expenses should be limited to 15 percent of your monthly net income, according to Ramsey. What Percentage of Rent Should You Pay According to Your Businesses Gross Income?. We’ll say that it’ll cost your business $200 a month to outsource your books. An operating expense ratio of 0.63 means that for every dollar of … If you are focused on optimizing inventory, another useful measure of inventory or working capital is the ratio of inventory to sales or inventory as a percentage of sales. Typically, we take our income, subtract our expenses, and call the leftover profit (if we’re lucky enough to have any). Be smart about it! The rent-to-sales ratio is a traditional measure of the affordability of commercial space. How to calculate ideal food cost percentage. Percentage of Sales to Categories of Expenses. If you don’t have time for a whole book, I’ve written an introduction to the system for you. When you get into a routine with your business, and you start to turn those “investments” into profit. But there needs to be a really good reason that actually justifies your expenses. Aw, gee, I guess I’ll tell ya. Calculate your expenses for the same period of time for which you collect sales data. Said another way, it indicates how much each dollar in sales revenue cost the company to achieve. Generally, you don't want management salaries to exceed 10 percent of sales in either a full- or limited-service restaurant. He labeled the normal calculators with $50 and financial calculators at $150. Every restaurant is different and has different labor needs. Fixed expenses, including such items as rent of building, utilities and fixed salaries, often do not correlate with sales. Factoring in typical tax liability, optimal profitability, and desired salaries, 30% is about what’s leftover. There could be certain justifications for why your expenses are higher than 30%. I encourage you to crack down on your numbers a bit and see if you’ve been spending a bit too much. So first off, I definitely recommend reading the book. Solution: Use below given data f… The calculation can be used to find the percentage of sales for all expenses and also for specific expense categories. Multiply the result by 100. The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin—after all expenses—is in the 10 percent to 12 percent range. You don’t pay your staff as a percentage of the jobs you bring in, do you? For every percent that you don’t spend on business expenses, that’s an extra percent of income that gets to go to your next personal paycheck! It is a simple and easy process to calculate KPI. Now he wants to know the profit % earned by him. Get started today with where you’re at, and work your way towards it. Figure it out. For example, suppose your revenue for a particular period equals $200,000 and your expenses for the same period equal $95,000. With this in mind, his recommended percentage to be allocated to Operating Expenses is 30%. is a freelance writer specializing in careers, education and technology. University of Leicester: Working with Percentages, Accounting Tools: Percentage-of-Sales Method. If you have to work down to 30%, that’s fine. In 2019, the average logistics costs accounted for 11% of sales. You’d need to work on increasing your income and cutting your spending down to just the necessities until you can fit into the 30% mark! Reviewed by: Jayne Thompson, LL.B., LL.M. Knowing what percentage of revenue should be spent on payroll for your specific business is the first step toward profitability. Depending on what you’re selling, the standard gross-to-rent percentage can range anywhere from less than 1 percent all the way up to more than 13 percent, with most industries paying below 10 percent. Additionally, you average $685 in monthly expenses for that same time frame (factoring in monthly increments towards annual renewals and investments in courses and coaching).