Definition
The sales expense to sales ratio allows analysts to understand how efficient a particular sales channel is at generating revenues. Calculating its sales expense to sales ratio allows a company to direct resources to the most effective channels. Companies can also track this metric over time, looking for movements that might indicate a change in consumer purchasing behavior.
Calculation
Sales Expense to Sales Ratio = (Sales Salaries and Commissions + Sales Expense) / Sales
Where:
Sales Expense includes costs associated with a particular sales channel. This can include call center charges, travel or web applications.
All expense and sales revenues generated should be isolated to a single sales channel; for example, inside sales, outside sales or the web.
Explanation
As growing companies continue to look for new sources of revenue, it's equally important for them to understand how effective each sales channel is at generating revenues. Calculating the sales expense to sales ratio allows companies to understand the effectiveness of each approach. The lower the sales expense to sales ratio, the higher the gross profit margin.
Tracking the metric over time also allows companies to understand if there is a process improvement opportunity, or if consumer purchasing behavior is moving from one channel to another. The metric can also be compared across geographies to see if one sales team may have best practices that can be shared with another.
In some industries, there is significant lag between expense and the collection of revenues. Analysts need to be aware of the sales lead to close timeframe or risk an inaccurate assessment.
Example
Company A's sales team is split into a northern and southern region, and each team has a manager responsible for establishing their processes. In the past, Company A allowed each region to operate autonomously. A new director of sales wanted to know if each region was performing equally. Analysts at Company A produced the table below:
| Northern Region | Southern Region | |
| Sales Revenues | $11,808,720 | $9,661,680 |
| Inside Sales Salaries | $826,610 | $821,243 |
| Outside Sales Salaries | $354,262 | $289,850 |
| Commissions | $118,087 | $122,220 |
| Travel Expenses | $7,085 | $5,797 |
| Total Sales Expense | $1,306,044 | $1,239,110 |
| Sales Expense to Sales Ratio | 11% | 13% |
Based on the above information, the director of sales determined a cross-regional best practices team would only be able to shave 2% from the southern region's expenses, which is $1,239,110 x 0.02, or $24,782. With such a small opportunity, the director of sales was satisfied each team was functioning as expected.
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