Sales to Administrative Expense (SAE) Ratio
The sales to administrative expense ratio (SAE) is a financial metric that assesses a company’s ability to handle its non-operating expense to help other operations to bring in more sales. Simply put, if you are managing your fixed costs well, you should have smooth day-to-day operations. In turn, this should lead to improved sales.
Many people don’t see or understand the full impact that administrative costs can have. Administrative expenses aren’t directly related to sales, product production, or delivery. Examples of these would be senior employee salaries, HR expenses, and so on. Such expenses are crucial to sustaining a company’s core operations. For this reason, they are also known as central expenses.
Without these, a company cannot work properly, and operational efficiency can suffer. To ensure stability, these are usually fixed amounts. This means that, while the actual amounts involved vary wildly, the company must incur them no matter how their sales are performing.
The sales to administrative expense ratio also reflects the sales volume that is generated by a business, compared to each dollar of the administrative costs. A higher ratio is favorable because it demonstrates that the company’s central functions have a better amount of operating leverage. Likewise, a climbing Sales to Administrative Expense Ratio indicates that the firm is capable of increasing its sales using the same fixed expenses.
Sales to Administrative Expense Ratio Formula
Every item in this formula is found in a company’s income statement on their annual report. Knowing the details of the business’ non-operating expenses may require a closer review. The Sales Report section is found on the top line of the income statement, while Administrative Expenses comes after Cost of Goods Sold, right before Operating Profit.
Some companies merge Selling, General and Administrative Expense (SG&A) into one line in their income statement. In some cases, an analyst may take Selling Expenses out of this value and use General & Administrative Expenses instead when computing for the ratio. This is because the selling expenses would directly relate to product sales and not administrative expenses.
While the results may differ between industries, a company should typically stay between 10% and 25% for their ratio. A low Sales to Administrative Expense Ratio may indicate a less-than-efficient system within their corporate structure. Such flaws may be related to process issues. These could include outdated systems and software.
For instance, a company may still rely on manual accounting, which clearly demands a huge workforce. It requires a lot more man-hours, resulting in increased fixed costs. Ideally, management should be responsible for minimizing these costs, although the company might require additional cash flow to help make these improvements.
Sales to Administrative Expense Ratio Example
Henry is an analyst working for the plastic manufacturer, Zakko. He is concerned that they might be overspending on their administrative costs without a positive effect on sales. He would like to know how much of the company’s sales are spent on these costs. If their total administrative expense is $13,200 and their Total Sales is $54,290, what is their sales to administrative expense ratio?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- Total Sales: 54,290
- Total Administrative Expenses: 13,200
We can apply the values to our variables and calculate sales to administrative expense ratio:
In this case, the plastic maker would have a sales to administrative expense ratio of 1:0.24.
What makes a good administrative expense ratio depends on the industry of the business being analyzed. For this example, Zakko spends 24% of its sales on administrative costs (24 cents on admin expenses for every $1 of revenue), which is within the accepted range of 10% to 25% for manufacturing companies.
In the health care sector, however, administrative expenses can total up to 50% of sales and it would be considered normal.
Sales to Administrative Expense Ratio Analysis
Management usually relies on the sales to administrative expense ratio to predict the results of its corporate strategy and growth plans. Often, a fast-growth phase means drastically high administrative costs, complicated management structures, and redundant functions and departments. Analysts have to keep track of such changes carefully over a long period to assess the success of any changes.
Firms considering a merger or acquisition should check their Sales to Administrative Expense Ratio to help them in decision-making. While studying a target, an acquirer weighs the synergies or potential financial benefits, that can come after a merger. A good way to attain synergies is by eliminating duplicate or overlapping back-office tasks. The company might conduct a meticulous cost analysis to help the company understand a potential merger’s effects.
Additionally, these analysts should also consider this ratio from a historical and industry-specific perspective. If the number is going down from one year to another, then it could be a sign of a problem. This means the fixed costs need to be distributed across lower sales. Fixed costs also depend on the business sector of the company. Comparing different companies can help you understand where the company fits into the current market. When performing peer analysis, the size of the competition is also important to focus on. Theoretically speaking, bigger companies must have a higher sales to admin expense ratio.
Specifically, a company that has been acquiring businesses through the years is expected to take on many additional costs, from audit fees to advisory fees, and so on. If these expenses are one-time costs, they should not be included in the ratio calculation. In contrast, if the cost is a consistent part of their strategy, these expenses must be included.
Analysts should be ready to go through any capital expenses as well. These costs may come with opening a back-office and employing senior managers. This might require a sizable initial investment, which can lead to increased sales over a longer period of time. Usually, the sales to administrative expense ratio is expected to get better through time.
Sales to Administrative Expense Ratio Conclusion
- The sales to administrative expense ratio measures how much of a company’s sales is spent on administrative costs.
- The SAE ratio formula requires two variables: total administrative expenses and total sales.
- This calculation evaluates how well-managed administrative expenses can positively affect sales.
- The sales to administrative expense ratio is typically expressed as a percentage.
- Analyzing sales and administrative expenses is helpful for merger and acquisition planning.
Sales to Administrative Expense Ratio Calculator
You can use the sales to administrative expense ratio calculator below to quickly calculate how much of a company’s sales is being spent on administrative costs by entering the required numbers.
1. What is the sales to administrative expense ratio?
The sales to the administrative expense ratio (SAE) is the calculation of how much of a company’s sales is spent on administrative costs.
2. What is the formula of sales to administrative expenses?
The formula for sales to administrative expenses is total administrative expenses divided by total sales.
3. What is a good administrative expense ratio?
A good administrative expense ratio is anything below 50%. This means the company is not spending too much of its sales on administrative costs.
4. What is the difference between selling and administrative expenses?
Selling expenses are costs related to the sales of goods and services. Administrative expenses, on the other hand, are costs associated with general company operations that are not related to sales. These can include items such as payroll, rent, and utilities.
5. Is sales commission a selling or administrative expense?
Sales commission is a selling expense. This is because it is directly related to the sales of goods and services. Other administrative expenses, such as rent and payroll, are not related to sales.