Your expense ratio — the percentage of revenue consumed by operating expenses — is one of the most revealing metrics in your business. It tells you how efficiently you convert sales into profit.
How to Calculate It
Expense ratio = Total Expenses / Total Revenue × 100
If your business earned $100,000 last month and spent $75,000, your expense ratio is 75%.
What's a Good Expense Ratio?
It depends heavily on industry, but general benchmarks:
- Retail: 85-92% (low margins are normal)
- Services: 60-75% (labor-intensive but scalable)
- SaaS / Software: 50-70% (varies by growth stage)
- Restaurants: 85-95% (notoriously thin margins)
A lower ratio means more profit per dollar of revenue. But too low can mean underinvestment in growth.
The Most Common Expense Creep Sources
- Vendor contracts with automatic annual increases
- Software subscriptions no longer actively used
- Staffing costs growing faster than revenue
- Office/space costs fixed while revenue fluctuates
How to Improve It
The most effective approach is a quarterly expense audit:
- List every recurring cost
- Mark each as essential, optimizable, or eliminable
- Renegotiate the top 5 vendor contracts
- Set a monthly expense ratio target and track it
BlueHaze tracks your expense ratio automatically and alerts you when it trends in the wrong direction.