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What is cost revenue ratio?

Cost Revenue Ratio, abbreviated as CRR, is one of the key performance indicators used to determine the success of a business’ sales operations. But what is the cost of revenue, exactly?

CRR measures the operational efficiency ratio, meaning that a company should strive to achieve an optimal balance between its expenses and revenues. As an essential metric, the cost to revenue ratio is measured monthly and, compared to revenue, indicates if operating costs start exceeding the revenue and should be addressed. If the CRR shows that operating costs are decreasing while sales and revenue are on the rise, no corrective action is required, and responsible individuals can be rewarded.

CRR Meaning - the Expense to Income Ratio

When exploring financial terms and the efficiency ratios, in particular, it is important to understand that although there is a difference between cost and expense, as well as between income and revenue, many sources use the terms interchangeably.

For the sake of accuracy, let’s first align our understanding of these terms. While cost usually denotes money spent on buying the product or service, it becomes expenses only if it is further used. For example, a company creates a LinkedIn ad at a certain cost, but once it is shown, the ad becomes ‘advertising expense.’

A similar ‘nesting dolls’ principle lies in the difference between income and revenue. Income is part of revenue before all expenses and costs are deducted.

Thus, when you spot the term ‘expense to income ratio’ or ‘cost of revenue ratio,’ most probably, the definition will refer to the CRR as we describe it here.

How to Calculate the Cost to Revenue Ratio

To calculate the ratio, the formula uses the total cost of sales, including overhead plus other expenses and the total revenue. It is important to understand what lies behind each definition as different companies may use different terms describing the same processes.  

Total Revenue

The term total revenue is rather straightforward and self-explanatory and refers to the gross amount of earnings from sales before any deductions are made for taxes, expenses, etc.   

Cost of Revenue vs. Cost of Sales

What is the cost of revenue? Is it the same as the cost of sales? Again, we need to clarify the terms.

The cost of goods sold (COGS) and the cost of sales are applied to the same idea, measuring the direct cost of producing the product and using the labor plus material costs.

The cost of revenue includes the cost of sales plus other expenses, such as paying rent and salaries, maintaining a company’s website and landing pages, running outbound and inbound campaigns, and so on.

Cost and Revenue in B2B Lead Generation

Cost and revenue are important. Although measuring the cost to revenue ratio is associated with bank operations, it is applicable in ecommerce and B2B sales lead generation as well. Ecommerce businesses and lead generation agencies don’t leave their profits to chance. They plan their budgets and set their sales goals, and then adjust them accordingly. Buying business leads requires a budget, too. By approximating the size of its revenue, a company gets a benchmark for the sale of services or products.

With Belkins offering unique CB2B lead gen techniques to streamline sales processes, our clients can be confident that their costs and revenues will be aligned with their budgets and sales goals.

Calculating the Ratio: Examples

There are various online calculators able to help users find out whatever percentage or ratio they need: Cost revenue, profit margin, cost of goods sold, etc. You just need to know the required numbers from your financial statements, and the system will apply the standard formulas. However, the formulas are easy, and you can do it on your own.  

The formula for the ratio uses the cost of whatever you need to calculate and the total revenue. If you want to know the ratio only of the direct material and labor costs against the total revenue, calculate it as follows:

Cost to sales ratio = cost of sales / total revenue.

If the task is to grasp all the operational expenses, including marketing, sales, and distribution, use the following formula:

Cost of revenue ratio = cost of revenue / total revenue.

Keep in mind, ratios are usually calculated in percentages. To do so, multiply the results by 100.

For example, you gathered the company’s financial statements and receipts and counted the cost of sales as $600,000 and the total revenue $1,1M. Calculate the cost to sales ratio as follows: $600,000 / $1,100,000 x 100 = 54%.

Let’s say, the cost of revenue is higher, as it includes more fixed overhead expenses and makes in total $870,000. Now the cost revenue ratio is $870,000 / $1,100,000 x 100 = 79%.

It is up to financial teams to decide whether these percentages are good or bad news for business owners. The adequacy of the numbers largely depends on the industry in general and the profitability of a business in particular. Overall, accountants and marketers know their ballpark figures to keep marketing or salary costs below. For example, the percentage of operation costs for e-commerce should be lower than for retail.

Whereas the above operational efficiency ratios can be acceptable for some businesses, the percentage for marketing campaigns is usually lower. For example, you want to start a social media campaign this year and want to find out its efficiency using the CRR. You have the numbers from this year’s social media campaign: The total revenue of $300,000. Calculating the cost of revenue as $25,000, you get the ratio:

$25,000 / $300,000 x 100 = 8.3%.

In terms of a marketing campaign, this expense to income ratio implies that every $8 spent brings in $100 in revenue.

Is the Term Cost to Sales Ratio Clearer Now?

After grasping the general principle of calculating the efficiency ratios, you will get more flexible when dealing with budget variances. If B2B lead generation plays a large part in your business operations, cooperate with the best marketing and sales teams, and your company’s actual and suggested budgets will align. If you need leads urgently, find out how you can get them quickly by calling a Belkins expert. We are always eager to help companies grow!

 

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