What is a Business Expense Ratio?

The Business Expense Ratio shows how much of your revenue is consumed by operating expenses. It answers a critical question every founder, freelancer, and small-business owner should ask: “How efficient is my business at turning revenue into profit?”

Expense ratio is commonly used in:

• Small business financial planning
• Startup burn analysis
• Freelancer & agency pricing
• Investor and lender reviews

The Formula

Business Expense Ratio (%) = (Total Operating Expenses ÷ Total Revenue) × 100

Lower ratios mean higher efficiency. Higher ratios mean costs are eating into revenue.

What counts as expenses?

• Rent, utilities, internet
• Software & subscriptions
• Marketing & advertising
• Salaries, contractors, freelancers
• Insurance, accounting, legal
• Travel, equipment, supplies

Why this ratio matters

A business can be growing revenue and still be unhealthy. The expense ratio exposes hidden inefficiencies that profit alone can’t show.

Typical benchmarks

• 0–30%: Extremely lean (rare, often solo businesses)
• 30–50%: Healthy & scalable
• 50–70%: Watch carefully
• 70%+: High risk / low margin

How businesses use it

• Pricing decisions
• Hiring timing
• Cost-cutting analysis
• Investor reporting
• Runway planning

Examples

Example 1: Freelancer

• Revenue: $8,000/month
• Expenses: $2,400/month

Expense ratio = (2,400 ÷ 8,000) × 100 = 30%

Example 2: Small agency

• Revenue: $50,000/month
• Expenses: $32,500/month

Expense ratio = (32,500 ÷ 50,000) × 100 = 65%

Example 3: SaaS startup

• Revenue: $120,000/month
• Expenses: $96,000/month

Expense ratio = 80% → High burn, low margin.

How to improve your expense ratio

• Raise prices before cutting costs
• Replace fixed costs with variable ones
• Automate repetitive work
• Negotiate software contracts
• Delay hiring until revenue justifies it

Common mistakes

• Ignoring owner time as a cost
• Over-scaling tools too early
• Cutting growth spend instead of waste

FAQs

• Is lower always better?
  No. Extremely low ratios can indicate under-investment.
• Should taxes be included?
  Typically no. Expense ratio focuses on operating costs.
• Is this the same as expense ratio in investing?
  No. This is for businesses, not mutual funds.
• How often should I check?
  Monthly for small businesses, quarterly at minimum.