The equation for this ratio is quite simple and here it is:
(Gross Profit/Total Expenses) X 100 = Break Even (as a percentage)
So to understand the results, we refer back to the article on Understanding Ratios. We want the Gross Profit to win, but we are viewing the ratio from the Expenses point-of-view.
This means that if we have a number higher than one hundred, then each dollar of expenses has to wipe out more than one dollar of gross profit, which means we are doing well. If the number is below one hundred, then each dollar of expense is wiping out more than one dollar of gross profit and we will not be seeing any net profit at the end of the day.
In more technical terms, if the result is higher than 100%, then we are higher than our break-even and adding profit to the company. The total expenses also gives us an idea on how much we need to sell in order to break even.
In the next installment I will go over briefly some applications of this ratio.
Your business THRIVES on a solid FOUNDATION!!!