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E/R Ratios: A Simple Yet Powerful Tool for Effective Financial Management

In the technology industry, many top executives lack formal training in the use of financial analysis tools. While some of these tools may not necessarily apply, there are certainly several which are designed to help identify problem areas and manage the company’s finances more effectively. One of the better analytical tools for helping technology executives manage their profitability is called E/R Ratios, which stands for Expense to Revenue Ratios.

Your Income Statement, often called a P&L, is of course the best overall indicator of your profitability. To understand how your company is performing relative to your goals and your competition, it is very useful to calculate your E/R Ratios using your P&L. These ratios simply represent the relationship of your various expense types to your Total Revenue, calculated as a percentage. You can determine these percentages by major category (such as Marketing, Sales, Technical Support, General Admin, etc.), and then compare them to the numbers for previous years (or those of your competitors, if available). Learn how to calculate your E/R Ratios and use them as an effective way to determine where you are spending too much money, or conversely, not enough.

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