Revenue Per Employee - Does it Tell the Whole Story

Ken Kaufman's Profile

Revenue Per Employee Benchmarks

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 measures to determine if you have the right number of employees are revenue per employee benchmarks. Your industry has a benchmark that you can get from others in your industry or from one of the CFOwise partner's Business Dashboards. Request a Free Industry Report. 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.

Comments

Member's Profile

I like Ken's balance of quantitative and qualitative measures. One caution I would like to add is to consider your objectives and strategies before reviewing revenue per employee benchmarks. I have witnessed several companies that pursued this measure and did lasting damage to their operations. Here are two examples:
In one case, an institutional investor changed their investment policy to purse larger deals, reducing the number of staff required to perform the necessary due diligence given there would be fewer deals (there was a limited about of capital to be invested each year). As a result, their capital was concentrated into only a few very large investments. This lowered their diversification, increased their portfolio's risk, and suffered more in the recent downturn than had they maintained a broader portfolio.
In a second case, a company that had succeeded due to lavish attention on their high-end customers scaled back their service team to align with industry norms. This directly conflicted with the strategy that generated their initial success and both sales and margins faltered.
We can't make excuses for a bloated workforce, but carefully consider what makes your company distinct from the benchmark pool before setting headcount goals. Success may depend on being either more or less aggressive than your competitors.
So take Ken's urging to balance both quantitative and qualitative observations. As one of my favorite quotes goes, "The first sign we don't know what we are doing is an obsession with numbers." - Johann Wolfgang von Goethe

Thanks Ken!

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Member's Profile

David, I couldn't agree more. In a vacuum, the numbers are meaningless. In context, they mean everything! Thanks for your thoughtful comments!

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Ken, great blog post.

Folks may also want to take a lookat , take a look at

Proformative's Accounting Resources Guide:

http://www.proformative.com/resources/accounting-resources-guide

Enjoy!

Best... Sarah

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Member's Profile

Single measures, like revenue per FTE, can seriously distort decisions and are very unreliable. Direct margin per FTE may distort less but needs to be carefully calculated and be "supply chain structure" aware, as it is still a single measure. A better "dashboard" uses a handfull of measures to evaluate direct margin - one of my prefered measures for manufacturing - and indirect costs related to critical drivers. The "same industgry" is seldom the same structurally from firm to firm and individual industry measures are not likely to provide insight. Know your business model!

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Proformative Advisor
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Thank you Ken for the reference.
Was wondering if anyone out there in the media/publishing industry was willing to share whether you use this metric (revenue per employee.) Historically, I have not. Interested in the direct margin calc by Barrett, although I guess how you calculate direct margin will vary.

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Hi, I'm working on a software development project to assist small and medium sized manufacturing companies with workforce planning, and to help identify needed future workforce skills based on their strategic direction and business goals. I'm using revenue and profit per employee, various types of attrition using actuaries, BLS and other data sources, employee feedback/satisfaction factor analysis;

I realize the importance of having a balance of leading and lagging, hard and soft, and metrics for other aspects of the business, but was wondering if you have a recommended list of the vital few KPIs, from a strategic planning perspective. Also, what are the ingredients/equation for direct margin that you think are best. I know this depends on the industry, but say for small/medium sized manufacturing in general.

Thanks much, I am enjoying this blog quite a bit.

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Proformative Advisor
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I like this discussion, for it takes a "high tech" and "high touch" approach to business decisions that seem not to be part of today's equation.

"High tech", KPI, ratio's or any other analytic that uses data points to interpret.
"High touch", Using one's intellect, researching, talking with end-users to find out what really is going on that can not be shown by "High Tech" information.

We as a group have slowly moved to a focus of only looking at "high tech" results. While that's a great bellwether warning signal, it may not even sound a warning as some of the examples prior to this posting have alluded to.

Bravo Ken for leading the discussion a new direction!

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Great discussions. Would like to add that this all assumes that you have a proper revenue recognition method in place. For example, I've always been a fan of the measure, but when I started in a new company, they did not have a good revenue recognition method in place, therefore, the measure was skewed.

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I'm inclined to agree with Barrett re: revenue per employee as a metric. I would favor it's use for direct sellers as it would be indicative of a company's success in deploying that segment of its workforce but David's cautionary examples are very helpful in illustrating the downside of applying to a full employee population and/or bench marking against peers.

Thank you for the topic Ken!

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Proformative Advisor
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The suggestion will be different based on the industry you are in as mentioned. I thought using the revenue per employee would something neat to look at from the retail perspective. We pay on productivity so we can watch how productive one sales person is compared to another, store, etc. The higher the productivity the higher their sales revenue will be; however for a retail company that does not pay on productivity; this would be a great metric to review.

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There are many great Key Performance Indicators that can be used used to detect issues. Revenue per employee is a very good one. The quantitative piece actually has three parts - the ratio, the tolerance range, the trend. If a problem is identified on the quantitative side, then qualitative analysis is necessary.

But revenue per employee should be a staple statistic on any dashboard.

Great topic. Thanks.

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Ken, I left a comment on the blog site.

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Ken, than you for the article. I think the biggest issue is what mentioned David Wittenberg is his comment - the alignment with strategic objectives. I believe the best way to achieve this alignment is to use the Balanced Scorecard framework to build a cause-and-effect related business objectives and only then use "Revenue per employee" as a KPI.

Another thought is that "Revenue per employee" is more for benchmarking purposes. Inside the company managers could:
1. Focus on profit, not a revenue
2. Focus on profit of specific business unit/not the whole company

I share my thoughts on using this KPI in the article: http://www.bscdesigner.com/revenue-per-employee-kpi.htm

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Here's a different perspective - one that allows you to plan this from the start of the business, not change the tyre while travelling at 50mph:

Most businesses tend to grow by simply adding a few more people during busy times. They add one, then another one and add one more. Eventually the senior team realises the business used to make more money when it was smaller. Having the right number of people is a concept we call ‘capacity planning’ – calculating the exact number of people you need in each business team to maximise your profit level.

Throughout the recession, many businesses have had to lay off staff and reduce team sizes. At that same time they should have been focused on cash flow across the recession rather than on the strategic issue of having the right number of people to create profit.

For more, see: http://bit.ly/17OCYU0

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