Revenue per employee: A very important relationship!

There are some companies that employ thousands of workers but are still not able to generate huge revenue while others earn more profits with fewer employees.

As the CEO or top executive in your firm it is very important to maintain your focus on your companies’ strategies and regardless of your business phase keeping track of your revenue to employee metric is very important to success within your organization.

Revenue per employee is a crucial ratio, it looks at the proportion of proceeds to the number of employees required at that level of sales.  When making a comparison between two companies, the company with the higher value for revenue per employee would be considered more efficient and productive.

How it works:

Revenue per employee is calculated by dividing a firm’s revenue by its total number of workers (Revenue/Number of Employees).

Let’s take a look some sample figures from Company ABC:

2014 Revenue:  $50,000,000

Employees:  312

By using the information above into the formula, we can determine the firm’s revenue per employee as follows:

$50,000,000/312 = $160,256.41

Thus, every employee at Company ABC contributed approximately $160,256 in revenue for 2014.

Revenue per employee determines how effectively a company is operating in regards to its employees. A comparatively high revenue per employee is a positive sign that suggests the company is finding ways to achieve more sales (revenue) out of each of its workers.

Remember, labor demands fluctuate from industry to industry, and labor-intensive companies will normally have lower revenue per employee ratios than companies that require less labor.  So, when reaching conclusions about the relative performance of a company, benchmark comparisons should be made with competitors in the same industry.

Keep in mind that companies typically close for one of two basic reasons.  Either, they failed at marketing their products/services or generating sales.  In addition, companies fail to keep the costs to produce and market their product adequately low.

If you are evaluating a business, calculating revenue per employee will give an assessment of whether or not the business is generating adequate sales comparatively to its assets and people.

A steadily rising sales-per-employee ratio can mean a number of things…Increasingly efficient and well-run organization and great products that are selling faster than those of competitors.

Tracking this figure each month will enable you to make sound hiring decisions, manage your expenses, and be accountable to the labor investments you make.

Although you need to be careful when using this ratio, you can tell a lot about a company and its future from its revenue per employee figures.  Administrators will be able to get a quick sense of the company’s financial health and of how the company fares against other companies within the industry.  While the ratio doesn’t tell the whole story, it undoubtedly can help.

A company that consistently generates rising sales with a steady or shrinking work force can usually boost profits more rapidly than one that can’t make additional sales without adding more workers.

 

Do you know your company’s revenue per employees?

[themecolor]Dave Baney is the founder and CEO of 55 Questions, LLC.  We work with successful top executives with a driving ambition to crush their competition. We help CEOs and Entrepreneurs improve alignment, communication and accountability throughout their organization.[/themecolor]  http://www.55questions.com

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