Cost-to-income ratio equals a company's operating costs divided by its operating income. The cost-to-income ratio shows the efficiency of a firm in minimising costs while increasing profits. The lower the cost-to-income ratio, the more efficient the firm is running. The higher the ratio, the less efficient management is at reducing costs.
- Skill level:
- Moderately Easy
Determine a firm's operating costs. Operating costs are those which are directly related to running the firm, such as salaries and administrative expenses. For example, Firm A has £325,000 of operating expenses each month.
Determine the firm's operating income. Firms disclose operating incomes on their income statements. Operating incomes are cash inflows from the firm's operation. In the example, a firm has operating income of £585,000 each month.
Divide the firm's operating expenses by the firm's operating income. In the example, £325,000 divided by £585,000 equals Firm A's cost to income ratio of 0.555.
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