I recently had dinner with a group of fellow business owners to exchange war stories and share our opinions on the current state of the economy. Towards the end of the conversation, I asked the group what they thought was the most important financial ratio to calculate for a young, growing business. Several members of the group argued for profitability-based ratios. Others suggested operational ratios or gross margins. This generated some rather interesting discussion. My answer was different: revenue per employee.
Calculating revenue per employee
Revenue per employee takes the company’s total revenues and divides it by the average number of employees during the period of measurement. Suppose, for example, that you are analyzing a company with the following data points for 2010:
- Annual revenues: $48,000,000
- Total employees on January 1, 2010: 534
- Total employees on December 31, 2010: 592
In order to calculate our ratio, we would first take the average of 534 and 592:
(534 + 592) /2 = 563
Then we divided the annual revenue by the average number of employees:
$48,000,000 / 563 = $85,257.55
This company generated over $85,000 on average per employee. Is this important?
Why revenue per employee is important
Measuring revenue per employee (R/E) provides a large amount of valuable — and actionable — information.
R/E measures productivity
Productivity measures tell owners how efficiently a company operates. Greater efficiency means that you are doing more with less. For most companies, the largest expense is human resources. The more revenues that can be generated for each “unit” of human resources (i.e. an employee) the greater the efficiency of the company. If your business can generate $450,000 in revenues per employee but your main competitor is able to generate $525,000 per employee, then they are doing a better job of managing what they get in exchange for their human resources expenses.
Comparing revenue per employee
In order to find information on your industry and competitors, the Reuters stock screener provides Revenue per Employee under the “Efficiency Ratios” table available by clicking on the “Financials” tab for a given company.
Go to the article: The Most Important Ratio for Your Business
