Book To Bill Ratio Definition Examples How To Calculate

Book-to-Bill Ratio Definition

The book-to-bill ratio denotes the value of new orders received by an enterprise of its goods and services against the billing in the same period.

Book-to-Bill Ratio Formula

The book-to-bill ratio, also known as the BB ratio, is calculated as follows: –

Book-to-Bill Ratio = Orders Received / Completed Orders Billed

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Thus, to calculate the book-to-bill ratio, the value of new orders received is divided by the value of billing done for completed orders during the same period.

How Does It Work?

The book-to-bill ratio indicates the demand and supply for an enterprise or industry. A ratio greater than one indicates that the company is receiving new orders and thus increased demand. On the other hand, less than one indicates that the demand for the company’s products and services is declining.

In other words, a ratio greater than one indicates that the demand for products exceeds the supply, and the management can consider increasing its production speed. On the other hand, when the ratio is less than one, it indicates that the supply is more than the demand, and the management may consider lowering the production.

Examples of Book-to-Bill Ratio Calculation

Let us look at a few examples to understand the ratio better.

Example #1

A manufacturing company received an order of 10,000 units during a month, out of which the company shipped and billed 8,000 units.

Now,

=10,000/8,000= 1.25

It shows that the company has an increased demand for its products against its earlier orders, which is good.

Example #2

There is a company which manufactures electronic units. It received 100 new orders a month while billed 120 orders (including some orders from the previous month).

=100/120= 0.83

It shows that the company has a decreased demand for its products, which is a negative factor as its capacity is more than the demand. Also, they booked only orders amounting to $0.83 for every dollar billed by the company.

Factors that Influence Book-to-Bill Ratio

The following are the factors that influence the book-to-bill ratio: –

Decrease in overall demand for products in the industry: It may be possible that the overall industry has suffered due to seasonal factors, and the demand for the product declines for the entire industry. It will decrease the ratio for the industry.Lockdown or strike in the company: It might be possible that the company could not complete its pending orders due to strikes by the employees in the factory. It would decrease the value of orders billed and hurt the book-to-bill ratio.Negative publicity of the company: Sometimes, the image of a company goes down due to some negative news published against it. In such circumstances, the company may receive fewer new orders. It will also harm the company. On the other hand, if something works in favor of the company’s image, demand will increase, and new orders will be received, leading to a better ratio.Breakdown of the company’s machinery and equipment: The company’s productivity may be affected when there is a breakdown in its manufacturing plants. It will lead to lower completed orders, and the ratio will negatively impact.

Conclusion

The book-to-bill ratio is a critical ratio for investors. They can evaluate whether the company has good prospects by analyzing the ratio. For example, a company with a higher ratio may have more significant sales during the coming periods.

Also, it will give the investors an idea that the company is efficient in completing its orders, thus effectively utilizing its capacity.