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What Is Total Expense Ratio (TER)

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What Is Total Expense Ratio

What Is Total Expense Ratio (TER)? #

Total Expense Ratio (TER) is a financial term that helps small business owners see how much they spend compared to their total assets. It shows the percentage of a business’s money that goes toward costs like rent, salaries, and marketing.

For small businesses in India, understanding TER is important. Keeping expenses low can help businesses make more profit, improve efficiency, and stay financially healthy.

Why Is TER Important for Small Businesses? #

1. Helps Increase Profit

When a business controls its expenses, it earns more profit. A lower TER means the company spends its money wisely. Investors also prefer businesses with well-managed expenses, as they seem more stable and profitable.

2. Ensures Legal Compliance

In India, businesses must follow financial rules and be transparent about their expenses. A well-maintained TER helps them stay compliant with regulations and avoid financial penalties.

3. Attracts More Investors

Investors look for businesses that manage their costs well. A lower TER shows that the business knows how to control spending, making it a better option for investment.

Breaking Down TER: Which Costs Do They Include? #

1. Direct Costs

These are expenses related to making or selling products, such as:

2. Indirect Costs

These are daily business expenses that are not directly linked to making products. Examples include:

  • Office rent
  • Electricity and water bills
  • Internet and phone services

3. Administrative Costs

These are costs related to running the business, like:

  • Salaries of office staff
  • Office equipment and supplies
  • Legal and accounting services

4. Marketing Expenses

Businesses spend money on marketing to grow sales. Marketing costs may include:

  • Online and offline advertising
  • Social media promotions
  • Branding and design costs

How to Calculate Total Expense Ratio (TER) #

TER is calculated using this simple formula:

TER = (Total Expenses / Total Assets) × 100

Let’s break this down step by step:

  1. Calculate Your Total Expenses – Add together all the costs your business has. This includes direct, indirect, administrative, and marketing expenses.
  2. Find Your Total Assets – Total assets include things like cash, property, equipment, and inventory.
  3. Use the Formula – Divide total expenses by total assets and multiply by 100 to get the percentage.

For example, if a business has total expenses of ₹2,00,000 and total assets of ₹10,00,000, its TER would be:

(2,00,000 / 10,00,000) × 100 = 20%

A lower TER means better expense management.

Why a Lower TER Is Good for Your Business #

1. Gives a Clear Financial Picture

  • It helps businesses see where they are spending too much.
  • Owners can make smart decisions about cutting costs.

2. Improves Planning

  • Knowing your TER helps in setting budgets.
  • Businesses can plan better pricing strategies to stay competitive.

3. Increases Trust Among Investors

  • Investors prefer businesses that have control over their expenses.
  • A low TER makes it easier to attract funding and expand.

4. Helps Avoid Financial Risks

  • Managing TER well prevents unexpected expenses.
  • It ensures the business remains stable over time.

Common Challenges in Managing TER #

  • Poor Record Keeping: Not keeping proper financial records makes it hard to track expenses. Using digital tools like the Vyapar app for bookkeeping can help.
  • Unexpected Costs: Unexpected expenses can disturb planned budgets. Having a financial backup fund can prepare businesses for such situations.
  • Incorrect Expense Classification: If you do not record expenses under the right category, you may calculate TER incorrectly. Proper training and accounting software can help.
  • Lack of Financial Knowledge: Many small business owners may not have financial expertise. Seeking help from professionals or using financial management apps can make a difference.

How to Lower Your TER #

1. Perform Regular Financial Audits

  • Periodic checks help find unnecessary spending.
  • Analyzing reports helps set cost-saving goals.

2. Use Expense Management Software

3. Reduce Operational Costs

  • Find cheaper suppliers or negotiate better deals.
  • Optimize energy use by reducing wasteful spending.

4. Train Staff for Better Budgeting

  • Improving financial knowledge among employees helps cut costs.
  • Trainers can teach staff cost management techniques.

How Vyapar App Helps in TER Management #

  • Accurate Expense Tracking – Records and categorizes all expenses in real time to monitor spending.
  • Automated Financial Reports – Generates reports like profit & loss, balance sheets, and cash flow statements for better understanding.
  • GST and Tax Management – Handles GST billing and tax calculations, ensuring compliance and avoiding penalties.
  • Inventory and Supplier Management – Tracks inventory, optimizes purchases and prevents overstocking or wastage.
  • Digital Payment and Billing – Enables invoicing, digital payments, and automated payment reminders for better cash flow.

Vyapar helps small businesses track and manage their expenses. This leads to a lower Total Expense Ratio (TER) and better financial stability.

FAQ’s: #

What is a good Total Expense Ratio (TER) for a small business?

A good TER depends on the industry, but generally, a lower TER (below 20%) is ideal. Businesses should aim to keep expenses as low as possible while maintaining quality and efficiency.

How can a small business reduce its Total Expense Ratio?

Businesses can reduce their TER by monitoring expenses, negotiating with suppliers, using software, cutting costs, and training employees.

Does a high TER mean a business is failing?

Not necessarily. A high TER may indicate high operational costs, but it could also mean the business is investing in growth. However, consistently high expenses without increased revenue can be a warning sign.

How often should a business calculate its TER?

Businesses should calculate their TER at least quarterly to monitor expenses and make necessary adjustments. Regular tracking helps in better financial planning and decision-making.

Can TER be different for different industries?

Yes, TER varies by industry. For example, a manufacturing business might have a higher TER because of machinery costs. In contrast, a digital services company may have a lower TER because of its minimal operational expenses.

Conclusion #

Total Expense Ratio (TER) is a key financial metric that every small business should monitor. Keeping TER low means better savings, higher profits, and more growth opportunities.

Small businesses in India can control costs and succeed by tracking expenses. They can use digital tools like the Vyapar App. Making smart financial decisions is also important for long-term success.