How to calculate a cost-to-income ratio

Written by carter mcbride
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How to calculate a cost-to-income ratio
Divide the company's operating costs by its operating income. (Calculator image by Alhazm Salemi from Fotolia.com)

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

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Instructions

  1. 1

    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.

  2. 2

    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.

  3. 3

    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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