Overheads ratio record

It’s common practice to consider absolute cost numbers versus budget and prior year. However, accounting ratios show the relationship of one number to another relevant number which can be much more revealing. Using operating cost ratios helps you to identify inefficiencies in the running of your business which might otherwise be missed.

What are overhead ratios?

Ratios can be applied to most of the overheads in your chart of accounts, with the overhead cost item as the numerator (top of fraction).

Operating cost ratios are frequently calculated across all overhead cost items using sales or total overhead costs as the denominator (bottom of fraction). But this approach is often too simplistic and will not highlight inefficiencies.

Headcount driven ratios. Many overhead costs are affected by the number of people in your company. In these cases, use headcount as the denominator for the operating cost ratio.

Whilst some overheads are clearly related to headcount, for example training and recruitment costs, others may not be so obvious. Example 1. The main reason for landline and mobile phone costs fluctuating in many businesses is the number of people employed. The most appropriate ratio in this case will be telecommunication cost per head.  Example 2. The amount of office space required by a business is usually calculated with reference to headcount. Whilst you can’t usually flex your office space in the short term, monitoring the ratio of rent cost to headcount can be used to trigger a decision to sublet excess space.

Sales driven ratios. The level of sales is the relevant driver for some ratios. For example, the cost of sales travel, subsistence and sales tools ought to be related to sales levels. In this case use sales as the denominator for these costs.

Other denominators. Examples of other drivers to consider include the amount of space occupied, number of customers and the number of vehicles in a fleet.

Look for ratios for the most material overhead costs in your business and focus your efforts on these. Use our Overheads Ratio Record to help identify and track the ratios relevant to your overheads.