# Cost Revenue Ratio: Definition and How To Calculate

What is a cost revenue ratio? The cost revenue ratio is a measure of efficiency that compares a company’s expenses to its earnings. It considers the cost of revenue and the total revenue. The cost of revenue includes all the expenses of manufacturing, including marketing and shipping costs.

The sales manager is actually responsible for calculating the selling costs to sales ratio. Making the calculation correctly will enable you to determine the precise amount of revenue generated by the sale of your company’s goods. In most cases, the sales manager will compute this ratio once per month. This ratio also indicates whether a company’s finances are in good standing.

You can find the ratio you need by dividing the costs of selling by the total amount of sales, multiplying the result by 100, and then dividing the result again. Therefore, the equation should be (Cost of selling / Total value of sales) x 100. The best course of action is to keep things basic and simple.

First of all, you must understand that using precise numbers will ensure a good outcome. Make certain that the sales manager determines this ratio for every single product. Of course, adding up all the items will result in a number, and it’s the right number. However, you must examine each department individually to see how it produced and distributed the goods.

After dividing all sales and obtaining the results, you must understand what these ratios mean. A lower ratio means higher profit. Therefore, the secret to gaining customers is to purchase the pricey goods that have a lower ratio. This strategy will boost your profit for sure. Additionally, keep in mind that the costs associated with selling goods go beyond simply shipping them to the customer. These expenses cover the development, marketing, and distribution of the product, or, to put it another way, every dollar you spent bringing the product to the customer’s door. All of this is considered to be a selling cost.

On the other hand, a higher ratio indicates the exact opposite. In fact, a higher ratio indicates that a business is in debt due to its selling costs, and that debt must be eliminated. No matter what industry they operate in, two businesses could have the same ratio but a different debt. Therefore, you could gain some insight into your company’s performance by comparing its debt ratio to that of a competitor. The selling costs to sales ratio is significant, especially if you believe that something is wrong with your sales department, to sum up the information above. The secret to success is to keep a close eye on your sales manager, who will make sure you have the right numbers to work with.

## Comparing the cost of revenue vs. the cost of goods sold

Cost categories are a tool used by financial professionals to assess and contrast costs. The cost of revenue and the cost of goods sold are two frequent cost categories when examining revenue efficiency. Before determining your revenue ratio, it is helpful to understand how they differ even though they are similar:

### Cost of goods sold

The direct cost of producing items is known as the cost of goods sold, also known as the cost of sales. Businesses frequently include this expense on their balance sheet and use it to determine different kinds of profits. It includes the following:

### Cost of revenue

The total cost of producing and delivering goods to customers, including the cost of goods sold and additional production costs, is the cost of revenue. It involves the following:

## What is a cost revenue ratio?

The cost revenue ratio is a productivity metric that contrasts a company’s costs and profits. It considers the cost of revenue and the total revenue. The cost of revenue includes all manufacturing costs, including those for marketing and shipping. Total revenue includes all proceeds from sales made during a given financial period. The cost revenue ratio compares these two amounts.

The cost-to-revenue ratio can be used by businesses to monitor their effectiveness. A lower cost revenue ratio indicates that a company can generate more revenue while incurring fewer costs. A low ratio is viewed favorably by financial professionals as a sign of efficiency.

Businesses can assess the effectiveness of additional costs using the cost-to-revenue ratio. For instance, despite adding to the cost, a new marketing campaign that generates a lot of business may reduce the ratio. A company can attempt to lower this ratio over time by increasing revenue or cutting costs.

## How to calculate the cost revenue ratio

You can use the following formula to determine the cost-to-revenue ratio:

Cost revenue ratio = cost of revenue / total revenue

The procedures you can use to determine a cost revenue ratio are listed below:

### 1. Find the cost of revenue

To find your costs, consider all the manufacturing expenses. To determine a company’s costs, use a financial statement like a balance sheet. Consider the direct cost of labor, materials, marketing and distribution. Also, include any overhead costs as listed above. Add these costs together to get the cost of revenue.

### 2. Determine the total revenue

At the end of a financial period, a company’s balance sheet will show the total revenue. A company might list several types of revenue. Use the total or gross revenue, which displays the total amount of money made from sales, for this calculation.

### 3. Calculate the ratio

Divide the cost of revenue by the total revenue to calculate the ratio. Your answer will be a decimal, usually smaller than one.

### 4. Calculate the percentage

Financial experts typically use percentages when discussing the cost revenue ratio. To determine the percentage, multiply your ratio by 100.

For example: If you calculated a ratio of 0. For a cost-to-revenue ratio of 8%, multiply this number by 100.

This percentage now displays the revenue generated by each cost per \$100. If your cost-to-revenue ratio is 8%, that means your business makes \$100 in revenue for every \$8 it spends on costs.

## Example of cost revenue ratio

You can refer to examples to help you when determining a cost-to-revenue ratio. Here are two examples you can reference:

### Example 1

Stacey wants to calculate her cost-to-revenue ratio to assess the effectiveness of her bakery.

She calculates her direct labor and material costs using her financial statements, which come to \$15,000 in total. This pays for the bakers’ wages as well as the price of all the ingredients. She spends \$20,000 on marketing, and \$5,000 is spent on shipping her baked goods. Her annual overhead expenses total \$10,000 and include rent and baking supplies. To determine her overall cost of revenue, she adds these expenses:

\$15,000 + \$20,000 + \$5,000 + \$10,000 = \$50,000

She determines her total revenue from her financial statements, which is \$300,000

She divides her cost of revenue by the total revenue to arrive at her cost-revenue ratio:

\$50,000 / \$300,000 = .167

She multiplies this figure by 100 to obtain the ratio expressed as a percentage.

.167 x 100 = 16.7%

Staceys bakerys cost revenue ratio is 16. 7%. In other words, she makes \$100 in sales for every \$16 she spends on manufacturing costs. Next quarter, she can monitor her performance using this number. She can future-proof the ratio by decreasing her expenses or raising her revenues.

### Example 2

Shaun is a financial planner working with MultiTech Worldwide. This year, MultiTech plans to roll out a new marketing campaign, and Shaun needs to figure out the current cost revenue ratio to monitor its effectiveness.

He is aware that this year’s total revenue was \$1,000,000. The cost of revenue was \$50,000. By dividing the cost of revenue by the total revenue, he arrives at the cost revenue ratio:

\$50,000 / \$1,000,000 = 0.05.

He multiplies this value by 100 to convert it to a percentage.

0.05 x 100 = 5%

This means the companys cost revenue ratio is 5%. For every \$5 spent, the company gained \$100 in income.

Shaun can monitor and evaluate the effectiveness using this number. If the marketing campaign is successful, it will raise overall revenue rather than just a portion of it, which will result in an equal or lower cost-to-revenue ratio when the next calculation is made.

## Jobs that work with cost revenue ratios

Following instruction in cost-to-revenue ratio calculation, it may be advantageous to look for employment opportunities that call for the ability. Here is a list of options:

## FAQ

How do you calculate cost revenue ratio?

Cost of revenue as a percentage of total revenue Keep in mind, ratios are usually calculated in percentages. To do so, multiply the results by 100. For instance, you gathered the company’s financial records and receipts and determined that the total revenue was \$1,1M and the cost of sales was \$600,000.

What is a good cost revenue ratio?

OER should ideally range from 60% to 80%, though the lower the better.

What is a revenue ratio?

With a few exceptions, the efficiency ratio shows the expenses as a percentage of revenue (expenses / revenue), essentially showing how much money a company or person spends to make one dollar. Entities are expected to try to keep efficiency ratios as low as possible by cutting costs and increasing earnings.

What is the relation between cost and revenue?

The total sum of money that a business receives for goods sold or services rendered over a specific time period is known as revenue. The direct costs related to the production of the products a company sells are known as its cost of goods sold.