Hi James,

the problem with Ratio's is that there are often several different definitions in common use and all of them are correct in the context for which they are being used.

In the case of expenses it's a case of what do you want the expense to be a percentage of?

Generally for the given expense or collection of expenses they are interested in expenses as a percentage of sales which is what I would generally class as the expenses ratio.

So, for example, the expenses ratio could be written as :

Expenses * 100
Sales

And then broken down into

Distribution Costs * 100
Sales

and

Admin Costs * 100
Sales

and

Interest * 100
Sales


Basically replace the top line with whatever expenses you need to include.

The expenses ratio is working out what expenses have been necessary to generate the amount of sales that have been processed for the period.

The expenses ratio's are the bottom level of the profitability and efficiency ratio heirarchy on the profitability side.

I'm sure that you've already come accross the hierarchy (sometimes refered to as a pyramid) in your studies. If not it's something that you will come accross time and again. There's a bit too much to it to detail here but suffice that you know that all of the major ratio's interact to break down the ROCE so that one can determine from the ratio's what is causing the changes to profitability or efficiency.

I appreciate that you probably wanted a simple formulae type answer but that's not really how ratio's work (liquidity / gearing and investment ratio's excepted) and a lot is down to the skill and judgement of the accountant as to what figures are included in the analysis for a given situation.

This of course is why ratio formulae are never gven in accountancy exams where things such as coefficients of correlation and annuity tables are as those are constants where as ratio's involve judgement.

Bet your now more confused than when you asked the question!

simple answer would be

Expenses * 100
Sales

All the best,

Shaun.

Hi Shaun,

Thats impressive, it brings back memories!!!

Did you do all of that on Excel and then pasted it onto the forum? Wish my Excel was as good as that!

Best go got lots to do today!

A

Hi Amanda,

cheers, I thought about doing it in Visio but opted for my old favorite Excel... I really love that product despite what Microsoft keep doing to it.



Hi Steve,

from your other posts I'm sure that you'll really enjoy it when you move on to analysis of accounts.

As mentioned in my first post though it's getting into the area where there are often multiple right ways of doing calculations so it's more based on why you want to know a ratio rather than a preset this is how it's done.

That said, if everyone uses the calculations as set out above then it would be preset and life would be a darn site easier for us all.... Never going to happen of course but one can dream of a world where ten accountants in a room would all come out with the same answer to a straight question!!!

Your just a computer wiz kid Shaun. I've heard of Visio, its meant to be a powerful product, I know someone who did his plans for his extension on it!

A

Thank you very much shamus your living up to your title guru ! your a life saver thanks. :D

I've just sat my Financial Statements and Financial Performance exams and I can't say I enjoyed them lols but excellent diagram Shaun.

Sam