The Efficiency Ratio Calculator helps businesses measure how well they control operating costs in relation to the revenue they generate. This calculator falls under the financial efficiency calculator category.
The efficiency ratio is a key financial metric, especially for banks, service firms, and other operational-heavy industries. It shows what percentage of your income is being spent on running your operations. A lower percentage indicates that a company is spending less to earn revenue, which generally means it’s running more efficiently.
By using this calculator, financial analysts, small business owners, and corporate finance professionals can track performance, manage budgets, and spot areas needing cost control.
formula of Efficiency Ratio Calculator
Efficiency Ratio (ER) = (Operating Expenses (OE) / Total Revenue (TR)) * 100
Where:
- ER = Efficiency Ratio (percentage)
- OE = Operating Expenses (e.g., salaries, rent, utilities – but excluding interest and taxes)
- TR = Total Revenue (gross income from all sources, in the same currency as OE)
This formula reflects the percentage of income consumed by the cost of running the business. The lower the ratio, the more efficiently the company operates. If the ratio is too high, it signals excessive spending or low revenue.
General Reference Table
| Term | Description | Example Value |
|---|---|---|
| Operating Expenses (OE) | Costs directly tied to running the business | $450,000 |
| Total Revenue (TR) | All income earned before deductions | $1,000,000 |
| Efficiency Ratio (%) | Percentage of income used to run operations | 45% |
| Good Efficiency Ratio | Typically under 60% for banks and financial firms | Efficient |
| Poor Efficiency Ratio | Over 70%, may indicate spending issues or weak revenue | Needs improvement |
| Use in Banking | Measures how much revenue goes into operating costs | Key profitability metric |
| Use in Business Management | Guides budgeting and cost reduction strategies | Cost control tool |
This table provides clarity on commonly searched terms, helping users interpret results without needing to recalculate every time.
Example of Efficiency Ratio Calculator
Scenario:
A digital marketing firm wants to calculate its efficiency ratio. They reported:
- OE = $320,000
- TR = $800,000
Step 1: Apply the formula
ER = (320,000 / 800,000) * 100
ER = 0.4 * 100 = 40%
Result:
The firm has an efficiency ratio of 40%, which is considered very good. It means only 40% of the income is spent on operations, and the remaining 60% is available for profit, reinvestment, or other expenses.
Most Common FAQs
In general, an efficiency ratio under 60% is healthy. For financial institutions, lower is better. Ratios over 70% might indicate high costs or low productivity.
No. It only includes operating expenses like salaries, rent, and utilities. It excludes interest, taxes, depreciation, and amortization.
It’s a good practice to check it monthly or quarterly. This helps you track trends and quickly respond to rising costs or falling revenue.