Expense ratio: the “how much does $1 of revenue cost?” number

The expense ratio (also called the operating expense ratio) is one of the simplest ways to measure business efficiency. It answers a blunt question: how much of your revenue is consumed by operating expenses? It’s simple enough to calculate in seconds, but powerful enough to guide hiring decisions, pricing changes, and cost-control priorities.

Here’s the core formula:

• Expense ratio (%) = (Operating Expenses ÷ Revenue) × 100

If your monthly operating expenses are $30,000 and your monthly revenue is $50,000, your expense ratio is (30,000 ÷ 50,000) × 100 = 60%. That means 60 cents out of every dollar of revenue is spent on running the business, leaving 40 cents for everything else (profit, taxes, interest, reinvestment, and buffers).

In most businesses, operating expenses are the costs needed to operate day-to-day, excluding the direct cost of delivering the product. Typical examples include salaries (non-production), rent, software subscriptions, marketing, admin, insurance, utilities, and professional services. In some contexts, you may choose to include COGS (cost of goods sold) for an “all-in” ratio that captures the full cost structure. That’s why this calculator lets you toggle COGS on or off.

A ratio is useful, but you’ll usually want to see it paired with a margin. This calculator also shows:

• Operating margin (%) = ((Revenue − Operating Expenses − optional COGS) ÷ Revenue) × 100

Notice the relationship: if your expense ratio is 60% and there are no other costs included, your operating margin is roughly 40%. (In real accounting statements, there may be other line items — but for decision-making, this approximation is very helpful.)

Why this calculator is built for “virality” (and usefulness)

A calculator goes viral when it delivers a fast “aha” moment and tells you what to do next. Most expense ratio tools stop at a single percentage. This one is designed to be shareable because it:

• Updates in real time as you move sliders (so you can “feel” tradeoffs).
• Shows both expense ratio and operating margin (two sides of the same coin).
• Adds an interpretation label (Lean / Healthy / Watch / High / Loss).
• Gives tailored next steps based on your inputs (where to look first).
• Lets you save snapshots locally to compare across months.
• Includes built-in share buttons for quick posting or sending to a partner.

• Step 1: Pick your timeframe (monthly, quarterly, annual).
• Step 2: Enter revenue and operating expenses. If you want an “all-in” ratio, toggle on COGS.
• Step 3: Read the ratio, margin, and label. Then look at the “next steps” bullets under the results.
• Step 4: Save the snapshot. Repeat on the same day each month to see trends.

• Don’t compare your ratio to a different industry without context (SaaS vs retail vs consulting can be wildly different).
• Don’t “optimize” the ratio by underinvesting in growth (marketing, hiring, and product quality can be worth it).
• Don’t mix timeframes (monthly revenue with annual expenses will give nonsense results).

Three realistic examples (and what they mean)

The best way to understand expense ratio is to run examples that feel like your business. Below are three different models: service business, e-commerce, and SaaS. Notice how the ratio can look “good” in one model and “bad” in another.

You run a consulting business. Monthly revenue is $12,000. Operating expenses (software, coworking, marketing, admin) are $3,000. You choose not to include COGS because your “delivery cost” is mostly your time, not a separate line item. The expense ratio is (3,000 ÷ 12,000) × 100 = 25%. That’s very lean — and it’s common in solo services.

Monthly revenue is $80,000. Operating expenses are $22,000 (team, ads, tools, warehouse overhead). COGS is $36,000 (inventory + fulfillment costs). If you toggle COGS on, total expenses become $58,000. Expense ratio becomes (58,000 ÷ 80,000) × 100 = 72.5%. That’s “watch zone,” but not unusual for e-commerce — especially during growth phases when you spend aggressively on marketing.

Monthly revenue is $150,000. Operating expenses are $95,000 (salaries, cloud hosting, sales & marketing, admin). You may or may not treat hosting as COGS. Expense ratio is (95,000 ÷ 150,000) × 100 = 63.3%. That’s not “bad,” but it tells you margins are tight. The fastest levers might be pricing, churn reduction, or improving sales efficiency.

A ratio is a mirror, not a verdict. Use it to ask better questions: Which costs are fixed? Which scale with revenue? If revenue dips 20%, do we survive? If revenue grows 20%, does the ratio improve?

How to lower your expense ratio without hurting growth

If your ratio is high, the instinct is often “cut everything.” That can backfire. The smarter approach is to improve the quality of spending: keep the costs that generate revenue, reduce waste, and align fixed costs with realistic demand.

• Pricing / packaging: Raising price 5–10% can reduce the ratio immediately if demand holds.
• Sales efficiency: Reduce CAC, improve close rate, shorten sales cycle, or shift to higher-intent channels.
• Scope control: Stop doing low-margin offers. Focus on the products/services with best contribution margin.
• Fixed-cost audits: Renegotiate tools, contractors, rent, and recurring subscriptions. “Small” monthly leaks add up.
• Automation: Automate reporting, support triage, invoicing, or onboarding to reduce labor for the same output.

List your top 10 expense categories. For each category, ask two questions: (1) Does this directly increase revenue or protect core quality? (2) Is this cost fixed or variable? Start with costs that are not tied to revenue and are relatively fixed — those are most likely to create margin pressure.

Sometimes a very low ratio (especially in early-stage startups) means underinvestment. If you’re “too lean,” you may be leaving growth on the table. A healthy business often intentionally spends to acquire customers and build product quality — the goal is that spending converts into future revenue.

Frequently Asked Questions

• Is expense ratio the same as profit margin?

  Not exactly. Expense ratio measures the share of revenue consumed by expenses. Profit margin measures the share left as profit. If you’re only comparing revenue and operating expenses, then margin is roughly 100% − expense ratio. In real financial statements, taxes, interest, depreciation, and other items can change the final margin.

• Should I include COGS?

  Include COGS if you want an “all-in cost ratio” that reflects the full cost to deliver your product. Exclude COGS if you specifically want to monitor operating overhead (rent, payroll, tools, marketing) separately from delivery costs. Many teams track both: gross margin (with COGS) and operating expense ratio (without COGS).

• What is a good expense ratio?

  It depends on industry, pricing power, and growth stage. Service businesses often run lower overhead ratios than retail. Use this tool to compare against your own history first. If your ratio improves while revenue grows, that’s usually a strong signal.

• Why does the meter go beyond 100%?

  When expenses exceed revenue, your ratio is above 100%. That’s the “loss zone.” The meter caps at 150% for display so it stays readable.

• How can I reduce the ratio fast?

  The fastest levers are often pricing and focus. A small price increase or removing low-margin offerings can improve the ratio without cutting core capacity. Cost cuts help too, but avoid cutting the expenses that generate revenue.

• Can I use this for personal finance?

  You can, but it’s designed for business P&L thinking. For personal budgets, use a budget planner or cash-flow tool instead.