Rent-to-Revenue Ratio and why it’s important to your business

As many business owners will quickly tell you, rent is a reoccurring cost and it seems to always be going up. When making the decision on where your business facilities will be, Rent-to-Revenue Ratio can be a helpful and key statistic in driving smart decisions.

What is Rent-to-Revenue Ratio?

Very simply, Rent-to-Revenue Ratio is the percentage ratio of money a business spends on rent as it relates to the gross income of the business.

Example: If your annual rent is $10,000 and your gross yearly revenue is $100,000, your Rent-to-Revenue Ratio would be 10 percent.

How can this statistic be helpful?

This ratio can be used to keep leasing decisions in check. By analyzing industry trends though websites such as BizStats and BizMiner, you can make sure that your current rent or proposed rent is in line with what similar businesses in your industry are spending on rent.

Example: If the proposed rental rate on your office is $15,000 annual and your gross annual revenue is $100,000, but your industry’s average Rent-to-Revenue Ratio is 10%, you may be over paying 5 percent on your rental rate and could be more competitive in a different office building.

Bottom Line: Metrics drive your business, and there can be many to keep track with. A qualified Tenant Representative can provide you with this information and help you keep your hard costs in check so you can focus on what you do best – your business.

James Lomax is a Commercial Real Estate Broker with Colliers International in Huntsville, Alabama. He can be reached at 256.503.6088.