#### Full Definition of Business Efficiency

The efficiency ratio, a ratio that is typically applied to banks, in simple terms is defined as expenses as a percentage of revenue (expenses/revenue), with a few variations. A lower percentage is better since that means expenses are low and earnings are big. It is related to operating leverage, which measures the ratio between fixed costs and variable costs.

## Example

If expenses are \$40 and revenue is \$80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.5 or 50% (40/80). The efficiency ratio is essentially how much you spend to make a dollar.

In the above example, they spent \$0.50 for every dollar they earned in revenue.

Citigroup
Citigroup, Inc. 2003:

Revenues, net of interest expense: 77,442
Operating expenses: 39,168
That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.

## Alternative

If “benefits, claims, and credit losses” is added to operating expenses the ratio gets worse.

51109/77,442=0.66

## Alternative

If it’s calculated as revenue divided by expenses (interest expense, “benefits, claims, and credit losses”, operating expenses) it becomes 1 less the “income from continuing operations” margin.

68,380/94,713=0.72

#### Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Business Efficiency. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
Chicago Manual of Style (CMS):
Business Efficiency. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
American Psychological Association (APA):
Business Efficiency. PayrollHeaven.com. Retrieved January 26, 2022