Operating Expenses

• Running a business requires money; every company has some costs associated with doing business. Operating expenses are the costs of doing business. According to BusinessDictionary.com, the expenses are day-to-day costs not directly associated with production. Common operating expenses include rent, utilities, insurance premiums and equipment costs.
  
  

Operating Income

• While it takes money to run the business, the main goal is to turn a profit. Operating income is the money left over after covering operating expenses. It is also called net income. Gross income is the total amount of money the business brings in -- from its operations and from other sources, such as investments. Earnings before income taxes are the total operating expenses subtracted from the gross income results in the business’s pre-tax net income, or operating income.
  
  

Operating Expense Ratio

• If a business covers its expenses and still have money left over, it has turned a profit. The profit figure, by itself, may not be an adequate way of analyzing how effective the business is at managing its expenses and brining in profit. The operating ratio is the ratio of the operating expenses to net sales. Higher operating ratios show lower operating profit; lower operating ratios show higher operating profits. According to AccountingfoManagement.com, for manufacturers, an operating ratio between 75 and 80 percent is typically standard.
  
  

Expense Ratio

• The expense ratio is another helpful efficiency indicator for business owners. This ratio analyzes the ratio of specific expenses with regard to the income. For example, if inventory costs $3,000 and the net sales were $100,000, the expense ratio for that particular item is 3 percent. If the business tracks this ratio over time, it can find trends and patterns that reveal whether inventory costs are rising or falling and take steps to improve the ratio as necessary.