Revenue Per Employee
It is a measure that computes the amount of revenue generated by each employee, on average, for the company
Updated:
August 25, 2022Revenue per employee is a measure that computes the amount of revenue generated by each employee, on average, for the company. It is computed by dividing total revenue by the number of employees.
Analysts should look for historical changes in the ratio for the company itself or compare it against its peer companies operating in the same industry while conducting the fundamental analysis for a company.
A company would want this ratio to be as high as possible as it indicates higher potency of its employees, which ultimately leads to higher profits.
This ratio should be used only to compare companies operating in the same industry. Factors such as employee turnover and age of the company can also affect the company's revenue per employee ratio which will be discussed later in this article.
How it Works
The quantification of revenue generated by a firm per employee would indicate the efficiency levels of employee utilization of a firm. Therefore, a high ratio is preferable as it would mean higher productivity and profitability.
This ratio also indicates that the human capital is being managed efficiently by ensuring the company develops productive workers. Therefore, a high ratio would generally indicate a highly profitable company.
Another variation is the net income per employee ratio.
It is necessary to understand that this ratio alone should not be used to analyze a company; instead, it should be used along with other financial ratios.
Moreover, ratios of companies operating in the same industry should be compared. Otherwise, the ratio will be meaningless because of the different industry cost structures and profit margins.
A software company's employee revenue will be higher than that of a company operating in a labor-intensive industry.
Factors Affecting the Ratio
Several factors can affect a company's revenue per employee ratio, such as the industry in which the company is operating, the company's employee turnover, and the company's age.
All these factors have been explained in detail below:
1. The Company's Industry
Since labor requirements vary from industry to industry, comparing a company's revenue per employee to its peer companies operating in the same sector is necessary. However, this ratio is of very little use compared to companies operating in different industries.
For example, the traditional banking system requires a lot of people for customer care services; however, recently, emerging online banks do not need to hire too many employees, which increases their ratio.
Thus, a traditional bank's revenue per employee should be compared only with other banks. Companies operating in labor-intensive industries have a lower revenue per employee ratio than less labor-intensive industries.
2. Employee Turnover
Employee turnover rate influences the ratio of a company. Employee turnover rate refers to the number of employees leaving the company within a certain period.
Employee attrition and employee turnover are two different things; employees who retire or have been fired due to downsizing in a company are part of the employee attrition, whereas employee turnover needs to hire and train new workers.
Companies generally become less efficient during this hiring procedure as the subsisting employees have to mentor new employees.
There is also an increase in a company's expenses during the onboarding procedure as experts are brought into the company, seminars are conducted to train new employees, and they are paid even for their inefficiency.
3. The Age of the Company
Companies in their startup stage tend to have a small amount of revenue. As a result, these startups have a low income per employee ratio compared to matured companies which can divide the same number of employees over a more extensive revenue base.
However, the management of a fast-growing company would be able to grow revenue much faster than its employee expenses, leading to increased revenue per employee ratio.
Therefore, better competence in generating revenue per employee would result in the company's increased profits and margins.
Analysts looking to dive deep into calculations of revenue per employee for a company should look for the desired employee numbers and total revenue in the company's financial statements. It is an easily calculable ratio and can be compared easily with the industry peers.
Higher revenue per employee would indicate efficient functioning of an organization and low operating costs; they also are more productive than their peers.
Why should HR measure revenue per employee?
Measuring revenue per employee can be helpful for an HR manager to see if new people are required in the organization or if employees need to be fired from their jobs. Therefore, this ratio is a crucial piece of the puzzle for an HR team.
This metric, along with other metrics, helps the management evaluate each employee's productivity and financial value, assisting HR in improving its selection procedure and descending for a better employee experience.
1. Getting a broad picture of how well your team is operating
Measuring and monitoring employee performance is challenging for a manager; therefore, he would look for a team's overall performance to evaluate its employees' efficiency.
Therefore, several programs are conducted by HR managers to enhance employee efficiency by monitoring employees' stress levels and providing them breaks at constant intervals.
2. Identifying opportunities for improvement
When the revenue generated by each employee is compared with the industry average, it would indicate what the problems within the company leading to inefficiency are. A company should also learn from its competitors about its practices to motivate employees.
Let's assume there are two sales teams; one is paid a fixed amount of money regardless of its sales, whereas the other gets an incentive-based fee. Naturally, the team paid with an incentive fee performs much better than the other team.
3. Knowing how many employees you need
Marginal revenue for an increase in the number of employees can help to identify the impact of new people hired by the company. It will also help the manager know if the same revenue can be generated with fewer employees.
4. Beyond seeing employees as an expense
Employees are generally enlisted in a company's financial statements as an expense. However, this measure of revenue per employee views human capital differently and the income they have generated.
Different employees at different levels in the company come together to produce revenue for the company and thus should be measured accurately.
Everything You Need To Build Your Accounting Skills
To Help You Thrive in the Most Flexible Job in the World.
or Want to Sign up with your social account?