What’s a Healthy Expense-to-Revenue Ratio for SMEs?

What’s a Healthy Expense-to-Revenue Ratio for SMEs?

Understanding the correlation between expenses and revenue is of utmost importance to any business, and particularly for Small and Medium Enterprises (SMEs). The ratio of expense-to-revenue is said to be healthy when it signifies that the organisation is efficient in its operations and also determines whether the company is making a sustainable profit or not, thus not bleeding money unknowingly.
 

Nowadays, in the world of fierce competition and a factor-driven economy, Indian SMEs have to focus on their financial health. The process starts by measuring the expense-to-revenue ratio. It is the financial measurement that gives us a better understanding of the company's performance, that is, the success in managing its expenses in accordance with the earnings.
 

What is the Expense-to-Revenue Ratio?

The expense-to-revenue ratio tells what percentage of a company's revenue is utilised to cover its operational expenses.  It is calculated using the formula:

Expense-to-Revenue Ratio = (Total Expenses / Total Revenue) × 100

If your revenue is ₹1 crore and your expenses are ₹70 lakhs, your expense-to-revenue ratio is: 

 (70,00,000 / 1,00,00,000) × 100 = 70%

This means you're spending 70% of your earnings to keep your business running.

Why This Ratio Matters for SMEs

Several Indian SMEs are surviving on a small profit. A small change in the costs of the products or the inability of SMEs to achieve revenue targets can cause the business to go bankrupt. Over the years, this ratio has been the best hope of SME owners:

• Saving prior expenses for a better understanding of cost efficiency
• Recognising the areas where money is going faster than expected
• More efficient planning of your budget

• Prepare for scale without financial stress

   

It's possible, thoug,h that if this circumstance is a frequent one or even the numbers are above 90,% you are close to a point. This could be a sign of the financial burdens and insufficient funds for further investments or emergencies in your business.

What’s a “Healthy” Expense-to-Revenue Ratio?

There's no universal golden number, but general benchmarks can be applied depending on your industry:

 A smaller ratio implies an increase in profit margins. If we take, for example, a 60% ratio, it means 40% of the total income will still be available as the profit (before taxes and other deductions). A large ratio is a sign of the fact that a great part of the income is spent on the operation, which means only the small amount remained for the future projects.

Red Flags to Watch Out For

A surge of the expense-to-revenue ratio over a period of time may be indicative of a problem before it is apparent. It could point out:

• Vendor cost: Continuous and uncontrolled growth in supplier pricing levels or unsuccessful procurement.
• Over-hiring: Expanding the workforce too fast but without the necessary revenue support.
• Low productivity: More spending but at the same time no or little value generation.
• Hidden costs: Expenditure not kept in the records on subscriptions, purchases without approval, or reimbursements.

How to Improve Your Ratio

• Review all cost centers: Keep an eye on how you are spending your money through the use of regular checks.
• Automate monotonous tasks: Not only will automation save time and hence people, it can also minimize payroll expenses.
• Negotiate with suppliers: Carefully examine contracts and if possible, merge vendors to get the best terms.
• Decide on departmental budgets: Assign spending restrictions and analyze them monthly.
• Carefully watch the return on investment from expenses: Especially in the cases of marketing, software, and HR costs.

Why Traditional Tools Aren’t Enough

Prioritize the fact that the majorities of small and medium-sized enterprises are governed mostly by spreadsheets or a whole range of separate and disconnected tools for the plan and control of these businesses. These traditional methods are fault-ridden and difficult to keep up with real-time data of a company's financial situation.

When there is no deliberate effort to monitor the expenses of the organization:

• The process of getting approvals becomes much longer.
• Money spent by various departments over budget limits remains hidden.
• Planning for the future is just a mere mental exercise.

This is where smart spend management platforms

The Indian SME Landscape & the Cost Challenge

According to the official data, the sector of small and medium-sized businesses in India has substantial growth—with more than 63 million registered companies accounting for almost 30% of the country's GDP. But with this tremendous opportunity, enterprises encounter the task of scaling in a sustainable way. A lot of SMEs are in the habit of developing their business first without building efficient cost governance framework.

As a result this brings:

• Lack of transparency of fixed costs.
• Wrong financial decisions.
• Continuously high working capital needs.
• Unsustainable use of human resources and thus burnout.

Introducing Billcostro: Spend Clarity for Growing SMEs

If you're struggling to monitor where your money goes each month, it’s time to explore smarter tools.
Billcostro is a cost management platform built specifically for Indian startups and SMEs. It helps finance teams:

Get real-time visibility into all company expenses.

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• Set role-based budgets for teams and departments.

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• Automate approvals and flag policy violations.

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• Generate insights from historical spending.

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Link cost centres with revenue units for better planning.
 

  Improve Efficiency Before You Scale

Having a healthy expense-to-revenue ratio is quite similar to checking your business's alive. This indicates your growth if it is stable or not. Early on in the control of costs, Indian SMEs have higher profit margins, investor confidence is on steroids, and they are more resilient to economic slumps.

Cut back on your calendar and expenses. Do not let go of your plans for financial planning while waiting for funding or a cost spiral.

Book a free demo and see how interactive benchmarking can transform your financial planning.