What is a Book to Bill Ratio? Definition, Calculation and Examples
Book to Bill Ratio Definition
The book to bill ratio is a financial metric that compares the value of new orders booked by a company (ie bookings) to the value of goods and services billed or recognised as revenue over a specific period (ie billings).
This ratio is expressed as a numerical value and can provide insights into the company’s ability to generate future revenue.
In other words, the book to bill ratio can tell you how current demand compares to the revenue received from previous orders.
How to Calculate Book to Bill Ratio
The formula for calculating the book-to-bill ratio is:
Book-to-Bill Ratio = Bookings / Billings
Where:
Bookings = the total value of new orders received by a company during a specific period.
Billings = the revenue recognised by the company during the same period for the sale of products or services that have been completed or delivered.
Book to Bill Ratio Examples
Let’s look at an example calculation of the book to bill ratio:
Bookings for the month | £15m |
Billings for the month | £10m |
Therefore, the book to bill ratio is £15m / £10m = 1.5
In this instance, the company has a book to bill ratio of 1.5, which indicates a strong influx of new orders compared to current billings.
This suggests potential revenue growth in the upcoming month.
Interpreting the Book to Bill Ratio
Now that we know the formula and calculation of the book to bill ratio, we need to understand what the results actually mean:
Ratio Greater Than 1
A book to bill ratio greater than 1 indicates that the company is receiving more new orders than it is billing for completed projects or delivered products during the period.
This is generally seen as a positive sign, as it suggests a strong demand for the company’s products or services.
It also suggests potential revenue growth in the future, with a pipeline of orders that need to be fulfilled.
Ratio Less Than 1
A book to bill ratio less than 1 implies that the company is not receiving enough new orders to replace the revenue generated from completed projects or delivered products.
This is generally seen as a concern, as it suggests that the demand for products and services is declining.
The knock-on effect is this would be a decline in revenue received over the upcoming periods.
Ratio Equals 1
A book to bill ratio of 1 indicates stability and balance between new orders and recognised revenue.
The company is effectively just replacing its completed projects or delivered products with new orders.
Factors that Affect the Book to Bill Ratio
There are several factors that can influence the book to bill ratio of a company such as:
Economic Conditions
Economic cycles can significantly impact the demand for products and services.
During economic booms, companies may experience higher demand, leading to higher book to bill ratios.
Conversely, during recessions, the ratio may drop drastically as demand declines.
Seasonality and Industry Trends
Some industries have seasonal demand variations and patterns.
For example, the retail industry may experience higher demand during November and December before Christmas, and lower demand straight after in January.
Understanding these patterns is crucial for accurate interpretation.
Sales and Marketing Initiatives
The company’s ability to effectively sell and market its products or services influences new orders.
Effective sales and marketing strategies can positively impact the book to bill ratio by bringing in a host of new orders.
Supply Chain Problems
For companies that sell physical products, disruptions in the supply chain can impact a company’s ability to fulfil orders and this will negatively affect the book to bill ratio.
These could include natural disasters, supplier issues and transportation disruption.