What is revenue per employee and how can you calculate it to track productivity and profitability in your small business? Finance writer Sarah Iqbal explains this important HR metric on our blog.
Revenue per employee is one of the most important yet overlooked HR metrics that measures your employees’ success and their financial contribution to your business, which directly links to your business productivity. To put it another way, it can measure if your employees are generating enough revenue for your business.
This article will look at precisely what revenue per employee is, what is a good revenue per employee number, and how much revenue per employee your small business should be looking to make:
What is revenue per employee?
Put simply, your revenue per employee involves taking your annual revenue and dividing it by the number of employees. This gives you a simplistic overview of how much money each employee generates for your business. This metric is beneficial for understanding how you are doing against competitors who operate in the same market as you.
A company with a higher revenue per employee is likely to be more productive and profitable. There are a handful and external factors that can also impact the value of the revenue per employee number, including:
- Employee turnover
- Age of organisation
- The industry you operate in
A business with a high staff turnover is likely to be less profitable because of the constant training and recruiting costs incurred. Likewise, a start-up is expected to encounter more costs than the average small business in the early days.
What is the importance of measuring revenue per employee?
Generally speaking, where you can see a higher revenue per employee number, this indicates your business is likely to be more profitable and squeezing the maximum value out of your employees.
When comparing revenue per employee against other companies, it’s essential to choose businesses that operate in the same market as yours rather than small businesses in general for a genuine like for like comparison. This is because some companies, by nature, involve more labour-intensive work than others, which will, in turn, drive down their revenue per employee number.
Ideally, when comparing your business across your market sector, you want to see a higher revenue per employee, indicating that your employees are working more productively than other businesses. You’ll also need to look at their overall revenue and number of employees because these metrics will, of course, affect the result.
What is a good revenue per employee number?
The average UK business generates £118,000 of revenue per employee. However, we need to remember that this number is an average taken from all small businesses across the country. This includes everything from electricity producers and steel manufacturers to local independent outlets, bars, libraries, and everything in between.
This is why, when looking at your specific business, you need to compare your revenue per employee with that of your direct competitors or companies that operate in the same market as you. This will allow you to determine your revenue per employee benchmark more effectively. Once your company has determined the value revenue per employee, they can use this information to improve operations and report back to investors.
What insights can I gain by measuring my revenue per employee number?
A HR leader can determine valuable information by measuring this metric, for example:
Gain an overview of how well your team is operating
It won’t allow you to look at each team member’s performance, but it will measure your team’s overall performance and how well you are utilising their expertise. Knowing how much revenue per employee you are generating can help you tailor HR initiatives to help optimise employee productivity. For example, managing stress levels and workloads across your team.
Understand where there is room to improve
When you compare your data against other industry competitors, you’ll see where you excel and what you are perhaps lacking. For example, if you can see that your competitors are implementing HR initiatives to drive productivity in their teams, maybe you need to take that on board and consider how you could raise motivation levels.
Determine how many employees you need to grow
Your revenue per employee numbers can help you determine if you could generate the same income with fewer employees or how many more employees you need to recruit to achieve X% growth volume. Looking at your historical revenue per employee number, you will see what impact your newest hires have made on your business and how many more you’ll need to keep growing.
See employees as an asset, not just an expense
Most financial metrics measure employees as an expense to the business on their cash flow statements. However, understanding the value of revenue per employee will allow you to see how much each employee brings into the business rather than how much they are each costing you.
The bottom line
In conclusion, revenue per employee is an important metric to measure that allows you to compare your small business and others operating in the same industry to understand better how your staff efficiencies affect your overall financial performance.
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Written by Sarah Iqbal
Sarah Iqbal is a fully CIM qualified marketing executive and copywriter who specialises in business and finance writing. She regularly writes about how businesses can make profitable investments and use strategies to save on costs and boost revenue.