Business Efficiency

Business, Legal & Accounting Glossary

Definition: Business Efficiency



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


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Definition Sources


Definitions for Business Efficiency are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 18th April, 2020 | 1 Views.