Thursday, November 17, 2011

How to Use Revenue per Employee

How do you know if you are over or under-staffed? If sales are increasing, are you hiring too quickly or slowly to keep up? If your sales are dropping, are you cutting too many or not enough employees?

These are tough questions to answer, and every business owner needs to carefully consider quantitative and qualitative information to make the best decisions. Let me explain how this works and then give a couple of examples.

The most common quantitative measure to determine if you have the right number of employees is revenue per employee. Your industry has a benchmark that you can get from others in your industry or from a service that provides such metrics. For example, certain medical device manufacturers average about $250,000 per employee. Just take your total sales revenue and divide it by your total employees or full-time equivalents (FTEs). You should also consider your total salary, wages, payroll taxes, and benefit costs as a percentage of revenue relative to your industry averages and your historical performance.

The qualitative measurements include walking throughout your business and trying to determine how busy  your employees appear, listening to your employees complain about how they need more help if you expect them to keep up with the growing demand for your products, and more.

For example, your employees appear busy, but your sales are dropping meaning your revenue per employee is dropping, too. These two are not consistent, so you investigate to find out that your employees are taking longer to do the same work. In this example, the quantitative analysis wins and you know you need to "right-size" your staff.

Here's another example. Your sales are flat, yet your employees are increasingly complaining about being overworked. You investigate this inconsistency to find that the manufacturing function you used to outsource but then brought in-house is taking three times longer than anyone expected. Your analysis leads you to conclude you actually need to hire more employees to handle the extra work. When you compare the cost for the extra employees and the savings you generate from in-sourcing, you find you are actually more profitable than before, even though revenue per employee dropped.

A careful consideration of both qualitative and quantitative measurements will bring to the most effective staffing conclusions. Don't be afraid to ask the tough questions, and never depend exclusively on just the numbers or just subjective opinions.