Book-to-Bill Ratio Definition
Book to Bill ratio denotes the value of new orders received by an enterprise of its goods and services during a period against the billing done of goods and services provided by it, in the same time period.
Book-to-Bill Ratio Formula
Book-to-Bill ratio, also known as BB ratio, is calculated as follows:
Thus, in order 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 BB ratio indicates the measure of 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, a ratio less than one indicates that the demand for the company’s products and services is on a decline.
In other words, a ratio greater than one indicates that the demand for products is greater than 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 supply is more than the demand and the management may consider lowering down the production.
Examples of Book-to-Bill Ratio Calculation
Let us have a look at a few examples to gain a better understanding of the ratio.
A manufacturing company has received an order of 10,000 units during a month, out of which the company shipped and billed 8,000 units during that month
- = 1.25
This shows, that the company has an increased demand for its products as against its earlier orders which is a good thing for the company.
There is a company which manufactures electronic units. During a month, it received 100 new orders while it billed 120 orders (including some orders from the previous month).
- = 0.83
This shows, that the company has a decreased demand for its products which is a negative factor for the company as its capacity is more than the demand. Also, for every $ billed by the company, only orders amounting to $ 0.83 were booked during the month.
Factors that Influence Book-to-Bill Ratio
Following are the factors that influence the book-to-bill ratio:
- Decrease in overall demand of 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. This will decline the ratio for the industry.
- Lockdown or strike in the company: It is possible that the company could not complete its pending orders due to strikes by the employees in the factory. This would decrease the value of orders billed and have a negative impact on the book-to-bill ratio.
- Negative publicity of the company: Sometimes the image of a company goes down due to some adverse news published against it. In such circumstances, it is possible that the company will receive less of new orders. This will also have a negative impact on the company. On the other hand, if something works in favor of the company’s image, then demand will increase and new orders will be received, leading to a better ratio.
- Break-down of the company’s machinery and equipment: The productivity of the company may be affected when there is a break down in its manufacturing plants. This will lead to lower completed orders and the ratio will have a negative impact.
The book-to-bill ratio is a very important ratio for investors. This is because by analyzing the ratio, they can evaluate whether the company has good future prospects or not, as a company with a higher ratio is expected to have greater 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.
This has been a guide to Book to Bill Ratio (BB) and its definition. Here we discuss how does book to bill ratio works along with the examples and factors influencing the ratio. You can learn more from the following articles –