It can be easy to get lost in a thousand different metrics.
Between year-on-year growth, returns on invested capital, and debt to equity ratios, things can quickly get complicated. And it's not always clear how useful these metrics are when it comes to assessing the health of your company in a direct and simple way.
But there's one measure of your business's performance that's often overlooked and under-rated.
It's a reflection of your business's stability and sustainable growth, a measure of how well you're spending a huge chunk of your budget, and a healthy sign of an efficient and productive team.
And the best part? It's one of the easiest metrics you'll ever have to calculate.
Why revenue per employee is important
In simple terms, revenue per employee is just a measure of how much bang you're getting for your buck – regardless of the size, age or market share of your business. And that means that:
- Investors love it.
- You can directly compare your business against competitors of any size.
- You have a simple, easy to follow metric to base your important decisions and goals on.
It might not be an exhaustive, universal measure that makes all others redundant. But it is a quick and useful gauge that can help you quantify your performance against the competition.
How to calculate your revenue per employee
Arriving at a figure for your business's revenue per employee is simple.
In fact, it's so simple that the 'formula' is already contained in the name of the metric:
To calculate your revenue per employee, just divide your revenue by your number of employees.
Or if you want something a little more accurate:
Revenue per employee = Total revenue for your measured period, divided by the average number of full-time employees over that same period
So if you started your financial year with 40 employees, and ended it with 50 after taking £5 million in revenue, your calculation would look like this:
5,000,000 / 45 = £110,000 per employee
But what does that figure really mean in practice?
Comparing revenue per employee
While the revenue per employee metric is useful for comparing similar businesses – even similar businesses of different sizes and ages – it does have its limitations when it comes to businesses in different industries:
As you might expect, a company like Netflix that's selling a digital service can get more out of each employee than a company that sells on the high street. McDonald's, for example, needs many times more employees in its thousands of branches to make sales with a similar price tag.
Of course, we know that McDonald's is a hugely successful business, and its modest position in this infographic shouldn't make us think that it's running its workforce inefficiently. Its relatively low revenue per employee is just a natural feature of its industry.
Where a comparison of revenue per employee really becomes useful is when you start to compare direct competitors in the same field:
Almost every company in this infographic does many of the same things: producing computers and phones, selling software and providing cloud services.
And because of this similarity, the stark differences in revenue per employee really start to mean something – they can tell us a lot about the differences in efficiency between each company.
So what can the average business learn from these tech giants to gain a boost to their revenue per employee?
Cheating the system
Before we get into how you can start to improve your revenue per employee, we need to cover a few of the ways you probably shouldn't try to fiddle the metric.
The first and most obvious way to give it a boost is to reduce the bottom half of the equation: your number of employees.
You could make a few members of your team jobless. You'll certainly see a short-term spike in your company's revenue per employee as the others scrabble to pick up their workload, and your new figures might impress a few potential clients or investors.
But as you can imagine, it won't last. The extra strain on your remaining employees will actually start to reduce productivity over a longer period of time, and your staff won't be happy with the unnecessary extra work you're stacking up on their desks.
The second shady approach is to simply put a freeze on hiring during periods of growth. Your revenue will start to climb, while your number of employees stays the same.
You'll get a temporary boost to your revenue per employee figure. But again, you'll suffer from the same problems with long-term productivity and morale.
If you want to see a stable and agreeable boost to your revenue per employee, you'll need to think beyond sheer numbers of employees, and instead start thinking about your operational efficiency.
How to legitimately improve your revenue per employee
There's a reason why tech companies have some of the highest revenues per employee in the world.
For the most part, it's because tech companies are heavily invested in automation and digital tools.
When you start to take the basic and repetitive tasks out of your valuable employees' hands, you free them up to focus on more of the demanding, high-level tasks – like nurturing new clients, developing their teams, and taking your business into new markets.
We're not talking about a million-dollar robotic assembly line that can churn out products for you every week. And we're not talking about the need for super-human AI to assess every investment decision your company makes.
We're talking about affordable and powerful software that can help you organise your business's inventory, manage your customer relationships, connect your different departments and keep on top of your finances.
If you're ready to see how a few useful bits of cloud software could help you get much more out of every employee, get in touch with us today and see how we can work together.