![]() ![]() Hence, there is a focus on managing administrative expense versus the amount of sales it can generate. Generally, they will have large central functions to support global operations. These are mega companies with wide variety of operations. To understand the concept better let us look at two large conglomerates: GE and Honeywell. Thus, the SAE ratio also doubled in the same period. ![]() In the example, we see that the company has doubled its sales in three years and has been able maintain its SG&A expenses at the same amount each year. We have summarized the financial data along with the calculation of the ratio in the table below. Let’s look at a hypothetical example of a company A. Analyst might decide to remove selling expenses from this value to use general & administrative expenses in calculation of the ratio. Sales are reported on the top line of the income statement of a company.Īdministrative Expenses are mentioned after the Cost of goods sold and just before the operating profit in the income statement.Ĭompanies may combine selling, general & administrative expense (SG&A) in a single line in the income statement. Analyst might have to check the notes to account to get a detailed split of all ‘non-operating’ expenses of a company. Sales to Administrative Expense Ratio = Sales / Administrative ExpensesĪll the items in this formula can be located in the income statement of the annual report. The sales to administrative expense ratio formula can be calculated by dividing total sales by administrative expenses: Similarly, an increasing SAE ratio implies that the company is able to generate additional sales with the same fixed infrastructure. Higher the ratio better it is, as it implies better operating leverage of the central functions. Sales to administrative expenses ratio measures how much sales are generated per dollar of administrative expenses incurred by the company. In other words, these expenses are somewhat fixed and the company needs to incur regardless of the level of sales. These expenses are also called central expenses and are vital to maintain proper functioning of a company and increase efficiency of operations. These are non-operating expenses necessary to maintain the basic operations of a company. These expenses include salaries of senior employees, accounting and finance cost, HR expenses etc. Definition: What is SG&A Expense Ratio?Īdministrative expenses are the expenses which are not attributable to direct production or delivery of the products or services of a company. In other words, this ratio measures how well the firm is utilizing its fixed cost to manage its operations smoothly, which should ultimately reflect in better sales. The sales to administrative expense ratio (SAE ratio) is an efficiency ratio that measures how well a company is able to manage its non-operating expense and generate sales during the normal course of operations. ![]()
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