This efficiency ratio is used to measure if a company is efficient at managing its non-operating expenses in order to generate sales during the normal course of a company’s operations.
Basically, the sales to administrative expenses ratio shows if a company is using its fixed cost in order to manage its operations smoothly in an efficient way. Of course, if a company uses its fixed cost efficiently, this will eventually result in better sales for the said company.
The Basics of Sales to Admin Expenses
In order to come up with the administrative expenses of a certain company, we have to rule out the direct delivery or production of the services or products of that company. These expenses include finance and accounting cost, salaries of senior employees, HR expenses, and some other.
In short, the administrative expenses are the non-operating expenses that are required to keep a company moving, on track. Naturally, even though they are non-operating expenses, they are vital to the company, as their role is to make sure that a company is functioning properly and, therefore, increases its efficiency of operations.
Moreover, these administrative expenses are fixed to the company itself and they do not depend on the number of sales of that company – you can’t pay someone less just because the company had a bad sales month. The sales to admin expenses ratio is used to show the number of sales that are generated per dollar of administrative expenses. Of course, if the sale to admin expenses ratio is higher, it means that the core operations of the company are operating efficiently.
Furthermore, if this ratio shows a continuous increase, it means that a certain company is able to generate additional sales and profit without having to change its infrastructure.
The Formula of Sales to Admin Expenses
When it comes to finding out the sales to admin expenses ratio, we have to make use of a very simple formula. All we have to do is divide the total sales by the administrative expenses of a company.
All of the terms of this equation can be found in the income statement of the annual report. Moreover, the notes to account can be checked if one wants to see more detail about the non-operating expenses of a company, as they are also split there as well.
Some companies might show the SG&A – selling, general, and administrative expenses – in a single line on the income statement. An analyst that wants to find out the sales to admin expenses ratio could remove selling expenses from the total value that’s reported on the statement in order to use only the general and admin expenses when calculating this ratio.
As we mentioned, a high sales to admin expenses ratio means that the company is doing very well in regard to its infrastructure. On the other hand, a low ratio could mean that the core elements of the company are inefficient and a change to infrastructure is required.
The main use of the sales to admin expenses ratio is to predict hiring plans, corporate strategy, and growth planning. If a company is growing too much and too fast, it might be left with redundant departments, a complex structure of management, and very high administrative expenses.
These have to be closely monitored so that the analysts and management team of a certain company can come up with an effective strategy at the right time.