Why Does the Revenue Per Employee Ratio Matter?

Employees black and white silhouettes

The revenue per employee is, in fact, a ratio. It’s calculated as the company revenue divided by the number of people that are currently employed. Ideally, it should be as high as possible, since it is an indicator of the productivity, as well as an effective use of the available resources. It’s a useful ratio if you want to compare your company’s activity to one of your rivals.

Revenue Per Employee Example

Let’s take, for example, the Company XYZ. In 2005, they had a revenue of $50,000,000 and a number of 312 employees. We must divide the total revenue by the number of employees. As such, we have $50,000,000/312. The result is $160,256.41. This translates to the fact that every employee at this company brought an approximate $160,256 as a revenue for the year 2005.

Why Is the Revenue Per Employee Ratio So Important?

As we previously said, it is used as a tool to compare your company to others. Generally, a high revenue per employees shows that the company is making the most of each of its employees, which is great for profit.

However, keep in mind that there are major differences from field to field. For instance, a labor-intensive company will show a lower revenue per employee ratio than one that needs less labor. Because of this, you should compare the results only with other companies from your own field, if you want to obtain some relevant results. Don’t be scared if a company from a different field has a higher ratio than yours. Keep in mind that there are plenty of other factors that intervene, such as the age of the company, for instance.

A Historical Perspective

The number you obtained in the calculation above can be meaningless. What you need to do is to gain a historical perspective on the numbers. It’s important to compare this number to other historical readings. Does it represent a rise or a fall in the company profits? This is important for the investors as well since they can see how the company stacks up against other competitors.

A firm that is still growing might need to get some extra help at some point. However, the goal here is to grow the revenues faster than the growth rate of the labor costs. As such, the revenue per employee ratio is essential in determining the evolution rate of the company. A figure that is steadily growing shows you’re doing the right thing. If not, then you know you must work some more on increasing the efficiency.

Conclusion

You may not be aware of this, but the revenue per employee is a great indicator of the processes that are evolving in your company. They show how are you using the resources that are available and if there is more room for improvement. Moreover, with it you can tell whether your employees are reaching their maximum productivity or if they are slacking off. Nevertheless, you can start from here in imposing some new measures and channeling the efforts towards greater purposes.

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Author: Amanda Knowles

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