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Measures how well a company is managing its administrative expenses as compared to its sales.[sc:kit02 ]
Sales to Administrative Expenses Formula
Explanation of Sales to Administrative Expenses
The Sales to Administrative Expenses ratio measures how well the company is keeping its administrative costs under control for its current sales level. Some companies include their sales and marketing expenses in with administrative expenses, but others will keep these figures separate.
If the company you are analyzing reports sales and marketing costs separately, you will have to make the decision whether or not you will include these with the Sales General and Administration expenses.
Importance of Sales to Administrative Expenses
An increasing Sales to Administrative Expenses ratio is generally a positive sign, showing the company is more able to generate sales using its Sales General and Administration expenses. Rarely does a company’s performance suffer from administrative expenses being too small.
Hiring based on sales forecasts that turn out to be lower than expected, corporate mergers, and rapid growth phases tend to leave the company with a disproportionately high percentage of administrative expenses – often primarily consisting of salaries and benefits of the administrative staff.
Too much administrative overhead can indicate an overly complex managerial structure, redundant departments, and slow reaction to market changes. Keeping track of this ratio over time will yield a clearer picture of how the company keeps control of its administrative expenses, and comparing this ratio to competing companies provides even more insight.