Occupancy Cost Ratio for Retailers

The Occupancy Cost Ratio measures the occupancy cost of the business. It determines the amount of rent a business can afford to pay.

A rule of thumb is that the percentage should be no greater than 30% of the gross profit of the business, that is a business with a gross profit to sales of 40% cannot afford to pay more than 12% (30% of 40%) by way of occupancy cost

HOW TO CALCULATE THE OCCUPANCY COST RATIO:

 
What does this ratio mean when you compare it to your business’ own performance and industry standards?

If the percentage is too high:  This means the business can’t afford the rental and would have to seriously consider seeking premises in a lower cost area. This could result in a loss of goodwill built up as a result of trading in that location for a number of years.

 
If the percentage is too low:   You probably signed a lease at the bottom of the leasing cost cycle and the landlord will be looking to a substantial increase in rental at the earliest opportunity.

HYMIE ZAWATZKY

www.thetemplargroup.com.au