Revenue per employee: measure your success

In the first of our two-part series on HR concepts small business owners can use to measure contribution of employees, we dive into the “revenue per employee” calculation.

While small businesses have advantages of flexibility, fewer layers of bureaucracy and the ability to offer more personalised service over their larger counterparts, there’s a number of HR formulas and classifications big companies often use that small business owners can replicate to their advantage.

One of these is the measurement of “revenue per employee” (“RPE”).  We’ll overview this concept in this blog and, in the second part of our series, we’ll consider RPE in conjunction with classifying employees into “revenue-generating versus non-revenue generating” workers to determine whether you have the right balance of revenue-driving staff against those who perform support functions.

Revenue per employee measures how much money each employee generates for the company. This ratio helps determine how productively a company is able to utilise its employees and contribute to its business growth.

At its simplest form, revenue per employee is calculated by dividing annual revenue by current total number of employees.

Looking at revenue per employee numbers – in combination with employee costs and tenure – provides visibility into the lifetime value of employees. Ideally, a company wants the highest ratio of revenue per employee possible because a higher ratio often indicates greater productivity, which can translate to increased profits for the company.

Keep in mind RPE is often a lagging indicator of success: new employees for example, take time to learn the job before they start to deliver return on investment. Same with those who have transferred jobs or been promoted internally. It’s also relevant to note RPE should always be used in conjunction with other financial ratios to fully analyse a business and that RPE comparisons between businesses are most effective when comparing companies operating in the same or similar industry.

So how can you improve your RPE?

• Ensure you justify prospective hires in terms of their contribution to top (revenues) and bottom (net income) lines
• Look to recruit the best quality employees with the skills to make a contribution as soon as possible
• Allocate appropriate training and professional development resources to both new hires and existing team members.
• Recognise and reward your high performers: keep these guys around for as long as possible
• Do something about your underperformers as soon as performance issues arise

In our next blog, we’ll see how we can use the “revenue-generating versus non-revenue generating” concept to determine whether you have the right ratio of workers bringing in the dollars versus support staff.

Like what you’ve read so far? Bare Bones Consulting knows HR and has experience at HR Manager level across a diversity of industries to back up that claim. If you plan to use a HR Consultant, ask whether the person has been a HR Manager before…and for how long and for who. If the answer is “no”, you might like to consider whether you’d let a person with that experience loose amongst your most important asset: your people.